Adjusting Entries
- These are entries used to update accounts prior to the preparation of Financial Statements
because they affect more than one accounting period
1. BAD DEBTS EXPENSE – losses due to uncollectible accounts
Journal entry:
Bad debts expense xxx
Allowance for bad debts xxx
or
Doubtful accounts expense xxx
Allowance for doubtful accounts xxx
Or
Uncollectible accounts expense xxx
Allowance for Uncollectible accounts xxx
EXAMPLE:
The accountant maintains an estimate for allowance for bad debts equal to 5% of the outstanding
accounts receivable balance of which as of the current year P100,000. Record bad debts using the
allowance method.
Bad debts expense 5,000
Allowance for Bad debts 5,000
100,000 x 5% = 5,000
The payee passed away before settling his/her debt. Record bad debts using the direct write-off method.
Bad debts expense 5,000
Accounts receivable 5,000
100,000 x 5% = 5,000
Allowance method – pwede pang ma-recover or ma-settle ng payee yung account niya.
Direct write-off method – hindi na mababayad ng payee yung utang nya.
ALLOWANCE METHOD (WITH RECOVERIES / NABAYAD NA NG PAYEE YUNG UTANG NIYA)
Bad debts expense 5,000
Allowance for bad debts 5,000
#
Allowance for bad debts 5,000
Accounts receivable 5,000
#
Accounts receivable 5,000
Allowance for bad debts 5,000
#
Cash 5,000
Accounts receivable 5,000
ANSWER THESE PROBLEMS:
Accounts receivable and its corresponding allowance show P102,900 and P3,000 balance, respectively.
Estimate shows that 4% of accounts receivable will be uncollectible. Give adjusting entry on December
31, 20xx.
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Accounts receivable has a balance of P130,000. It is estimated that 2.02% of this will be uncollectible.
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Due to the sudden death of Mr. Cruz, a valued customer, P50,000 worth of receivables can no longer be
collected. Record the bad debts using the direct write-off method.
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2. DEPRECIATION EXPENSE – it is the allowance of plant asset over its estimated useful life. This is the
expense allotted for the wear and tear of property, plant and equipment due to passage of time.
Consider: Cost, Salvage/Scrap/Residual Value, Estimated Useful Life.
Straight line method: Cost – Salvage value / Useful life
Journal entry:
Depreciation Expense xxx
Accumulated depreciation xxx
EXAMPLE:
The equipment is acquired on January 1, 2014 at a cost of P100,000 with a useful life of 4 years and
scrap value of P20,000.
Depreciation expense – Equipment 20,000
Accumulated depreciation – Equipment 20,000
100,000 – 20,000 / 4 = 20,000
Furniture and Fixtures was acquired on April 30, 2014 at a cost of P50,000 and its estimated useful life
for 5 years and with a residual value of P10,000
Depreciation expense – Furniture and Fixtures 5,333.33
Accumulated depreciation – Furniture and Fixtures 5,333.33
50,000 – 10,000 / 5 = 8,000
8,000 x 8/12 = 5,333.33
ANSWER THESE PROBLEMS:
The company’s delivery truck and building cost P8,000,000. 62% of the cost was allotted to the building
and the remaining balance was allotted to the delivery truck. The building has an estimated useful life of
20 years and a scrap value of P360,000. Give the adjusting entry of the building on December 31, 20xx.
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The land was acquired on January 1, 2010 at a cost of P6,000,000. It is estimated to be useful for 30
years with a scrap value of P10,000
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3. ACCRUED EXPENSE – expenses already incurred, but not yet paid (Nagamit mo na yung service pero
di mo pa nabayad).
JOURNAL ENTRY:
Expense xxx
Payable xxx
EXAMPLE:
Rent totaling P80,000 for the months of November and December has been incurred but not yet paid by
the end of the year.
Rent expense 80,000
Rent payable 80,000
ANSWER THESE PROBLEMS:
A bill was received from Meralco in December 31, 20xx for P5,000.
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Received a bill from Daily Star for advertisements placed during the second week of November. The bill
is for P20,000 not to be paid until January 15 of next year.
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4. ACCRUED INCOME – income already earned but not yet received.
JOURNAL ENTRY:
Receivable xxx
Income xxx
EXAMPLE:
On December 16, Gel Call Center received a 30-day, 18% note from a customer for service rendered
amounting to P20,000.
Interest receivable 150
Interest income 150
20,000 x 18% x 15/360 = 150
ANSWER THESE PROBLEMS:
A bill amounting to P30,000 was sent to a lessee for renting one office unit belonging to the company for
the month of December in which payment will be received first week of January of next year.
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ABC Company lent P9,000 at 10% interest on December 1, 2019. The amount will be collected after 1
year. At the end of December, no entry was entered in the journal to take up the interest income.
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5. PREPAYMENTS – are expenses already paid but not yet incurred or used.
ASSET METHOD EXPENSE METHOD
Expense xxx Prepaid expense xxx
Prepaid Expense xxx Expense xxx
ASSET METHOD – nagamit na yung binayad (expired portion)
EXPENSE METHOD – yung natitira sa binayad na di pa nagamit (unexpired portion)
EXAMPLE:
On August 1, took out a fire insurance policy on the business premises. At that time, the annual
insurance premium of P6,000 was recorded in an expense account titled, “Insurance Expense”.
Journal entry:
Insurance expense 6,000
Cash 6,000
ADJUSTED:
Prepaid insurance 3,500
Insurance expense 3,500
6,000 x 7/12 = 3,500
ANSWER THESE PROBLEMS:
Refer to the previous example. Assuming that the said insurance was instead recorded last August 1 in
an asset account titled, “Prepaid Insurance”.
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Company A signs a one-year lease on a warehouse for P10,000 a month. The landlord requires that
Company A pays the annual amount (P120,000) upfront at the beginning of the year.
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The ledger account Supplies shows a P43,500 debit balance. A count of supplies on December 31
amounted to P9,800.
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On July 31, Divine Co. signed Compassion Co. for a 2 years advertising campaign. Divine Co. paid
P500,000 for the deal. What is adjusting entry on December 31 if Asset Method was used to record the
payment?
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6. UNEARNED OR DEFFERED INCOME – income already received but not yet earned
LIABILITY METHOD INCOME METHOD
Unearned income xxx Income xxx
Income xxx Unearned income xxx
LIABILITY METHOD – wala ng utang na service yung business sa customer (earned portion)
INCOME METHOD – may utang pa na service yung business kay customer (unearned portion)
EXAMPLE:
On June 1, AGS received 10 months rent in advance, P49,000.
LIABILITY METHOD:
Unearned rent 34,300
Rent income 34,300
49,000 x 7/10
INCOME METHOD:
Rent income 14,700
Unearned rent 14,700
49,000 x 3/10
ANSWER THESE PROBLEMS:
Santos received in advance last November 1 from the City Government of Batangas the amount of
P9,000 to service police vehicles for a nine-month period commencing on November 1, the payment is
reflected in the Unearned Revenues account.
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Assume instead that the income received in advance last November 1 was credited to the Service
Revenues account
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