AKLAN STATE UNIVERSITY

School of Management Sciences

Bachelor of Science in Accountancy
Banga, Aklan

BCFA 1: FUNDAMENTALS OF ACCOUNTING 1

Chapter 4
ADJUSTING THE ACCOUNTS

Adjusting Entries are entries made at the end of the period to assign revenues to the period in which they
are earned and assign expenses to the period in which they are incurred.

Many accounts need adjustments to reflect the current conditions as of time of reporting in order for the
statements to be meaningful. There may be financial data not previously recognized that need to be
recorded to make the books of accounts up to date like the expenses already incurred but no payment until
sometime in the subsequent period, and revenues already earned but no cash is collected yet.

Accrual Accounting requires that all revenue earned whether payment is received or not should be
recognized in the period the goods or services are delivered or rendered and that all related costs to
deliver the goods or to render, whether paid or not, should be recognized as expense to match the revenue.

ITEMS THAT NEED ADJUSTMENTS

1. Depreciation Expense. Property, Plant and Equipment depreciate due to passage of time. Thus,
the cost of these assets should be allocated over its estimated useful life after deducting the
salvage value.

Cost is the acquisition cost or purchase price of the depreciable asset.

Salvage value is the estimated value of the asset at the of its useful life.
Estimated useful life is the number of years the asset can be useful to the company.

Below is the formula for computing the annual depreciation.

Cost P xxx
Less: Salvage Value xxx
Depreciable cost P xxx
Divided by: Estimated Useful Life xxx
Annual Depreciation P xxx

Adjusting journal entry:

Depreciation Expense xxx
Accumulated Depreciation xxx

Example:
The company bought an office equipment with an estimated useful life of 5 years on April 1, 2019. The
cost of the office equipment is P50,000.00 with an estimated salvage value of P5,000.00. Prepare the
adjusting journal entry on December 31, 2019 to record the depreciation of the office equipment.

Cost P 50,000.00

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Less: Salvage Value 5,000.00
Depreciable cost P 45,000.00
Divided by: Estimated Useful Life 5 years
Annual Depreciation P 9,000.00

P9,000/12 x 9 months = P 6,750.00

Depreciation Expense 6,750.00

Accumulated Depreciation 6,750.00

The amount to be recorded is P6,750.00 since the equipment was purchased on April 1, 2019. The amount
of annual depreciation is apportioned by dividing it by 12 months and multiplying it to 9 months
representing the depreciation from April 1 to Dec. 31, 2019.

2. Bad Debts / Uncollectible Accounts / Doubtful Accounts are accounts that cannot be collected.

Adjusting journal entry:

Bad Debts Expense xxx

Allowance for Bad Debts xxx
To record estimated uncollectible accounts

Note: other terms for Bad debts expense are Uncollectible accounts and Doubtful accounts; while for
Allowance for Bad Debts are Allowance for Uncollectible Accounts and Allowance for Doubtful
Accounts.

Example 1:
The company estimated that 10% of the Accounts Receivable is uncollectible. The accounts receivable
shows a balance of P100,000. Prepare an adjusting journal entry on December 31, 2020 to provide for
the estimated doubtful accounts.

Bad Debts Expense 10,000.00

Allowance for Bad Debts 10,000.00
To record estimated uncollectible accounts

Example 2:
The company estimated that 10% of the Accounts Receivable is uncollectible. The accounts receivable
shows a balance of P100,000. Allowance for Bad Debts account has a balance of P 6,000. Prepare an
adjusting journal entry on December 31, 2020 to provide for the estimated doubtful accounts.

Bad Debts Expense 4,000.00

Allowance for Bad Debts 4,000.00
To record estimated uncollectible accounts

Required Balance, end (100,000 x 10%) 10,000.00

Allowance for Bad Debts, balance before adjustment 6,000.00
Adjusting Journal Entry 4,000.00

3. Accrued Expenses are expenses already incurred but not yet paid.

Adjusting journal entry:

Expenses xxx
Expenses Payable xxx

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 To record unpaid expenses

Example 1:
The company received an electricity bill amounting to P2,000 on December 30, 2019 which the company
will pay on its due date on January 3, 2020.

Adjusting Journal Entry on December 31, 2019:

Utilities Expense 2,000

Utilities Payable 2,000
To record unpaid electricity for the month

An expense (electricity) is already incurred, thus, it should be recognized by recording (debit to utilities
expense). A liability (utilities payable) should also be recognized since the company has not yet paid for
it.

Example 2:
Employees’ salaries for December 30, 2019 to January 4, 2020 amounting to P30,000 will be paid on
January 4, 2020 by the company.

Adjusting Journal Entry on December 31, 2019:

Salaries Expense 10,000

Salaries Payable 10,000
To record unpaid salaries at year end

Computation:
P30,000 / 6 days = P5,000/ day x 2 days = P10,000

Employees salaries amounting to P30,000 is for 6 days (December 30 to January 4). Salaries per day is
P5,000 (P30,000 / 6). At the end of the accounting period which is December 31, 2019, salaries expense
and payable should be recognized for 2 days (December 30 and 31, 2019) which the employees already
performed but still unpaid.

4. Accrued Income is income already earned but not yet collected/received.

Income Receivable xxx

Income xxx
To record income earned

Example:
A company received on July 1, 2019, a one-year 10% note receivable in the amount of P20,000. The
principal and interest are payable on the maturity date. Give the adjusting journal entry on December 31,
2019.

Adjusting Journal Entry on December 31, 2019:

Interest Receivable 1,000

Interest Income 1,000

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To record interest income earned.

Computation:
Interest = Principal x interest rate x time
= P20,000 x 10% x 6/12
= P20,000 x .1 x .5
= P1,000

The interest for 6 mos (July 1 to Dec 31, 2019) is P1,000, representing the earned portion of interest.

5. Prepayments are expenses already paid but not yet incurred or used.

Asset Method Expense Method

Journal Entry upon payment (initial recording). Journal Entry upon payment (initial recording).

Prepaid Expense xxx Expense xxx

Cash xxx Cash xxx
To record advance payment To record advance payment

Adjusting Journal Entry at the end of Accounting Adjusting Journal Entry at the end of Accounting
period. period.

Expense xxx Prepaid Expense xxx

Prepaid Expense xxx Expense xxx
To record expired or used portion To record unexpired or unused portion

Example:
On November 1, 2019, XYZ Company paid a one-year advance office rental for P36,000. Prepare the
adjusting journal entry on December 31, 2019.
Asset Method Expense Method
Nov. 1, 2019 Nov. 1, 2019

Prepaid Rent 36,000 Rent Expense 36,000

Cash 36,000 Cash 36,000
To record advance payment To record advance payment

December 31, 2019 December 31, 2019

Rent Expense 6,000 Prepaid Rent 30,000

Prepaid Rent 6,000 Rent Expense 30,000
To record expired or used portion To record unexpired or unused portion

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Note: Using asset method, asset account (Prepaid Rent) is used in initial recording of transaction while
under Expense Method, expense account (Rent Expense) is used. Used portion is 6,000 (36,000/12
months x 2 months) from Nov. 1 to Dec. 31, 2019. While unused portion is 30,000 (36,000/12 months x 10
months or 36,000 – 6,000)

Asset Method Expense Method

Prepaid Rent Rent Expense
Debit Credit Debit Credit
11/1 36,000 12/31 6,000 11/1 36,000 12/31 30,000
Bal. 30,000 Bal. 6,000

Rent Expense Prepaid Rent

Debit Credit Debit Credit
12/31 6,000 12/31 30,000
Bal. 6,000 Bal. 30,000

The adjusting entries under different methods have the same effect on the ledger accounts.

6. Deferrals are income already collected or received but not yet earned.

Liability Method Income Method

Journal Entry upon collection/receipt of cash Journal Entry upon collection/receipt of cash
(initial recording). (initial recording).

Cash xxx Cash xxx

Unearned Income xxx Income xxx
To record advance collection To record advance collection

Adjusting Journal Entry at the end of the Adjusting Journal Entry at the end of the
Accounting period. Accounting period.

Unearned Income xxx Income xxx

Income xxx Unearned Income xxx
To record expired or used portion To record unexpired or unused portion

Example:

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XYZ Company received advance office rental on Oct. 1, 2019 amounting to P48,000 for 12 months. Give
the Adjusting Journal Entry on December 31, 2019.
Liability Method Income Method
Oct. 1, 2019 Oct. 1, 2019

Cash 48,000 Cash 48,000

Unearned Rent 48,000 Rent Income 48,000
To record advance collection of rental To record advance collection of rental

Dec. 31, 2019 Dec. 31, 2019

Unearned Rent 12,000 Income 36,000

Rent Income 12,000 Unearned Rent 36,000
To record income earned To record unearned income

Note: Using liability method, liability account (Unearned Rent) is used in initial recording of transaction
while under Income Method, income account (Rent Income) is used. Earned portion is 12,000 (48,000/12
months x 3 months) from Oct. 1 to Dec. 31, 2019. While unearned portion is 36,000 (48,000/12 months x
9 months or 48,000 – 12,000).
Liability Method Income Method
Unearned Rent Rent Income
Debit Credit Debit Credit
12/31 12,000 10/1 48,000 12/31 36,000 10/1 48,000
Bal. 36,000 Bal. 12,000

Rent Income Unearned Rent

Debit Credit Debit Credit
12/31 12,000 12/31 36,000
Bal. 12,000 Bal. 36,000

The adjusting entries under different methods have the same effect on the ledger accounts.