Adjusting Journal Entries Adjusting

Journal Entries
The Accounting Cycle
Accruals
Adjusting Journal Entries
Accrual adjusting entries are the means for
Adjusting journal entries (AJE) are accounting including transactions that
entries made to a occurred during the current accounting period but
company's journal of accounts at the end of a have not yet been
financial period. recorded in a company's general ledger accounts.
The process allocates income and expenses to the Without accrual adjusting entries, those
actual period in which the transactions will likely be reported in
income or expense occurred. a later accounting period.
It is composed of at least nominal account and real
account. Accruals

Purpose of AJE Accrual

This is prepared to confirm with the accrual
concept and matching principle. Accrued
Income
Accrual Concept
Accrued
states that income is Expense
recognized when earned
regardless of when it Accrued Income
was collected and
expenses are recognized Accrued income or accrued revenue is an income
when incurred already earned but not yet
regardless of when it recorded because it is still uncollected. (e.g.
was paid. interest earned on notes
receivable, unpaid rental of a tenant, etc.)
Matching Principle Without this AJE, asset and income of the
company is understated.
matching principle aims
to align expenses with Accrued Income
revenues. Expenses
should be recognized in Proforma Adjusting Entry:
the period when the
revenues earned with Receivable account X,XXX
them are recognized.
Income account X,XXX
Why is AJE Important?
▪ At the end of the accounting period, some income Accrued Income
and expenses may have
not been recorded, taken up or updated; hence, Example 1:
there is a need to update The company leases its building space to a tenant.
the accounts. The tenant pays monthly
▪ If adjusting entries are not prepared, some rental fees of P2,000. On June 30, no entry was
income, expense, asset, and made. AJE would be:
liability accounts may not reflect their true values
when reported in the June 30 Accrued Rent Income P2,000
financial statements.
Rent Income P2,000
Types of Adjusting Journal Entries
OR
Accruals Deferrals June 30 Rent Receivable P2,000

Depreciation Allowance for Rent Income P2,000

Bad Debts
Accrued Income
 wage for the employees is P5,000. The transaction
Example 2: was not recorded in the
The company lent P9,000 at 10% interest on accounting books. To record the AJE:
August 31, 2021. The amount Dec 31 Salaries Expense P5,000
will be collected after 1 year. No entry was made
on the interest earned at Accrued Salaries Expense P5,000
the end of the year. AJE would be:
OR
Dec 31 Interest Receivable P300 Dec 31 Salaries Expense P5,000

Interest Income P300 Salaries Payable P5,000

▪ (P9,000 * 10% * 4/12) 4 mo. from Aug 31 to Dec Accrued Expense

31 Example 5:
The company borrowed P6,000 at 12% interest on
Accrued Income August 1, 2021 payable
after 1 year. No entry was made at the end of the
Example 3: year.
The company lent P9,000 at 10% interest on Dec
1, 2021. The amount will be Dec 31 Interest Expense P300
collected after 1 year. No entry was made on the
interest earned at the end Interest Payable P300
of the year. AJE would be:
(P6,000 * 12% * 5/12) 5 mos from Aug 1 to Dec 31
Dec 31 Interest Receivable P75
Types of Adjusting Journal Entries
Interest Income P75
Accruals Deferrals
▪ (P9,000 * 10% * 1/12) 1 mo. from Dec 1 to Dec 31
Depreciation Allowance for
Accruals Bad Debts

Accrual Adjusting
Journal Entries
Accrued
Income Deferral

Accrued Deferral is the postponement of the recognition of

Expense “an expense already paid
but not yet incurred” or of “revenue already
Accrued Expense collected but not yet earned.”
Accrued expenses refer to those that are already A journal entry that adjusts an amount already
incurred but have not yet recorded on the books of a
been paid. (e.g. unpaid salaries, commission, company because part of the amount pertains to a
interest, rent, etc.). future accounting
Without this AJE, liability and expense of the period.
company is understated. Hence,
income is overstated. Deferral

Accrued Expense Deferral

Proforma Adjusting Entry:
Deferred
Expense account X,XXX Expense

Liability account X,XXX Asset

Method
Accrued Expense
Example 4: Expense
The employees worked for the last three days of Method
the year 2021. The total
Deferred Dec 31 Supplies Expense P900
Income
Office Supplies P900
Liability Total amount paid
Method
100%
Income
Method 60%
40% Unused
Deferred Expense Used
This is an expense paid in advance and recorded
as such. This is considered Asset
as an asset until the benefit is received hence there Expense
is a need to adjust at the
end of the accounting period. (e.g. prepaid 100%
advertising, insurance, rent, etc.)
600
Deferred 900
Expense 1,500

Asset Deferred Expense – Asset Method

Method Example 6:

Expense Office Supplies Office Supplies Expense Cash

Method 1,500 900 900 1,500

Deferred Expense – Asset Method 600 900 1,500

Under the asset method, a prepaid expense Unused Used
account (an asset account) is
recorded when the amount is paid. AJE will be Deferred Expense
made to an expense account This is an expense paid in advance and recorded
to all or portion of the prepayments expired at the as such. This is considered
end of the period. as an asset until the benefit is received hence there
Proforma Entries: is a need to adjust at the
end of the accounting period. (e.g. prepaid
Initial Entry Adjusting Entry advertising, insurance, rent, etc.)

Prepaid Expense XXX Deferred

Cash XXX Expense
To record prepayment
Asset
Expense Account XXX Method
Prepaid Expense XXX
To record adjustment Expense
Method
Deferred Expense – Asset Method
Example 6: Deferred Expense – Expense Method
The company purchased office supplies amounted Under the expense method, an expense account is
to P1,500 on December 7, recorded when the
2021. amount is paid. AJE will be made to an asset
account to all or portion of the
Dec 7 Office Supplies P1,500 prepayments unexpired at the end of the period.
Proforma Entries:
Cash P1,500
Initial Entry Adjusting Entry
Deferred Expense – Asset Method
Example 6: Expense Account XXX
On December 31, 2021, 60% of the supplies have Cash XXX
been used. To record prepayment
Prepaid Expense XXX
Expense Account XXX Deferred Expense – Asset Method
To record adjustment Example 8:
On September 1, 2021, the company acquired an
Deferred Expense – Expense Method insurance for its properties with a
Example 7: coverage of one year months amounted to
The company purchased office supplies amounted P24,000.
to P1,500 on December 7,
2021. Sept 1, 2021 Dec 31, 2021 Sept 1, 2022

Dec 7 Office Supplies Expense P1,500 Used – P8,000 Unused – P16,000

Cash P1,500 24,000 X 4/12 24,000 X 8/12

4 mos from Sept 1 – Dec 31 8 mos from Dec 31 –
Deferred Expense – Expense Method Sept 1
Example 7:
On December 31, 2021, 60% of the supplies have Deferred Expense – Asset Method
been used. Example 8:
On September 1, 2021, the company acquired an
Dec 31 Office Supplies P600 insurance for its properties with a
coverage of one year months amounted to
Office Supplies Expense P600 P24,000.

Total amount paid Dec 31 Insurance Expense P8,000

100% Prepaid Insurance P8,000

60% Sept 1, 2021 Dec 31, 2021 Sept 1, 2022

40% Unused
Used Used – P8,000 Unused – P16,000

Asset Deferred Expense – Asset Method

Expense Example 8:

100% Prepaid Insurance Insurance Expense Cash

24,000 8,000
600
900 8,000
1,500 Unused Used

Deferred Expense – Expense Method 24,000

Example 7:
24,000
Office Supplies Office Supplies Expense Cash
600 1,500 1,500 8,000

600 900 1,500 16,000

Unused Used
Deferral
600
Deferral
Deferred Expense – Asset Method
Example 8: Deferred
On September 1, 2021, the company acquired an Expense
insurance for its properties
with a coverage of one year amounting to P24,000. Asset
Method
Sept 1 Prepaid Insurance P24,000
Expense
Cash P24,000 Method
Deferred Deferred Income – Liability Method
Income Example 10:
On Jan 31, the company rendered 20% of the
Liability services required to the
Method customers.

Income Jan 31 Unearned Revenue P6,000

Method
Service Revenue P6,000
Deferred Income Total amount received

Unearned revenue (also known as deferred 100%

revenue/income) represents revenue
already collected but not yet earned (e.g. advanced 20%
rental paid by the tenant, interest 80% Unearned
income collected in advance, etc.). This is Earned
considered a liability until it is earned
hence there is a need to adjust at the end of the Liability
accounting period. They are also Income
called "advances from customers“.
100%
Deferred
Income 24,000
6,000
Liability 30,000
Method
Deferred Income – Liability Method
Revenue Example 10:
Method
Unearned Revenue Service Revenue Cash
Deferred Income – Liability Method
Under the liability method, an unearned income 24,000
account (a liability account)
is recorded when the amount is received. AJE will 6,000
be made to an income
account to all or portion of the advances earned at Unearned Earned
the end of the period.
Proforma Entries: 6,000 30,000

Initial Entry Adjusting Entry 30,000

Cash XXX 30,000

Unearned Income XXX
To record receipt of 6,000
payment
Deferred Income
Unearned Income XXX
Income Account XXX Deferred
To record adjustment Income

Deferred Income – Liability Method Liability

Example 10: Method
The company made P30,000 advanced collections
from its customers on Revenue
January 10, 2021.
Initial entry: Method
Jan 10 Cash P30,000
Deferred Income – Income Method
Unearned Revenues P30,000
Under the income method, an income account is
recorded initially when the Unearned Revenue Service Revenue Cash
amount is collected. AJE will be made to a liability
account to all or portion 24,000
of the services not yet rendered at the end of the
period. 30,000
Proforma Entries:
Unearned Earned
Initial Entry Adjusting Entry
24,000 30,000
Cash XXX
Income Account XXX 30,000
To record receipt of cash
payment 24,000

Income Account XXX 6,000

Unearned Income XXX
To record adjustment Deferred Income – Liability Method
Example 12:
Deferred Income – Income Method Lala Enterprise leases its available space to third
parties. On March 31, 2021,
Example 11: it received an advance payment for two years from
The company made P30,000 advanced collections a tenant amounting to
from its customers on P84,000.
January 10, 2021. Initial Entry:
Initial entry: Marc 31 Cash P84,000
Jan 10 Cash P30,000
Unearned Rent Income P84,000
Service Revenue P30,000
Deferred Income – Liability Method
Deferred Income – Income Method Example 12:
Lala Enterprise leases its available space to third
Example 11: parties. On March 31, 2021, it
On Jan 31, the company rendered 20% of the received an advance payment for two years from a
services required to the tenant amounting to P84,000.
customers.
Mar 31, 2021 Dec 31, 2021 Mar 31, 2023
Jan 31 Service Revenue P24,000
Earned – P31,500 Unearned – P52,500
Unearned Revenue P24,000
Total amount received 84,000 X 9/24 84,000 X 15/24
9 mos from Mar 1, 2021–
100% Dec 31, 2021

20% 15 mos from Jan 1, 2022 – Mar

80% Unearned 31, 2020
Earned
Deferred Income – Liability Method
Liability Example 12:
Income Lala Enterprise leases its available space to third
parties. On March 31, 2020, it
100% received an advance payment for two years from a
tenant amounting to P84,000.
24,000
6,000 Dec 31 Unearned Rent Income P31,500
30,000
Rent Income P31,500
Deferred Income – Income Method
Mar 31, 2021 Dec 31, 2021 Mar 31, 2023
Example 11:
Earned – P31,500 Unearned – P52,500
Asset cost xx
Deferred Income – Liability Method Less: Estimated salvage value xx
Example 12: Depreciable cost xx
Divided by: Estimated useful life xx
Unearned Rent Income Rent Income Cash Depreciation expense xx

52,500 Depreciation
Proforma Adjusting Entry:
31,500
Depreciation Expense XXX
Unearned Earned
Accumulated Depreciation XXX
31,500 84,000
Depreciation
84,000 Example 14:
A company acquired a delivery van of P40,000 at
84,000 the beginning of 2021. The
van has an estimated useful life of 5 years and a
31,500 salvage value of P6,000.

Types of Adjusting Journal Entries Jan 1, 2021 Service Vehicle P40,000

Accruals Deferrals Cash P40,000

Depreciation Allowance for Depreciation

Bad Debts Example 14:

Adjusting Depreciation = Cost – Salvage Value

Journal Entries
Useful Life
Depreciation
Depreciation is an accounting method of allocating Depreciation = P40,000 – P6,000
the cost of a tangible or
physical asset over its useful life or life expectancy. 5 years
Depreciation represents
how much of an asset's value has been used up. December 31, 2021
Depreciation Expense P6,800
Types of Depreciation
1. Physical Depreciation Depreciation = P6,800
2. Functional or economic depreciation
Accumulated Depreciation P6,800
Computation of Depreciation
Straight-line Method: Depreciation
Under the straight line method, the cost of the fixed Example 14:
asset is distributed Dec 31, 2021 Depreciation Expense P6,800
evenly over the life of the asset.
Three factors are involved in computing of Accumulated Depreciation P6,800
depreciation expense:
1. Asset cost is the amount an entity paid to Dec 31, 2022 Depreciation Expense P6,800
acquire the depreciable asset.
2. Estimated salvage value is the amount that the Accumulated Depreciation P6,800
asset can probably be
sold for at the end of its estimated useful life. Dec 31, 2023 Depreciation Expense P6,800
3. Estimated useful life is the estimated number of
periods that an entity Accumulated Depreciation P6,800
can make use of the asset.
Dec 31, 2024 Depreciation Expense P6,800
Computation of Depreciation
Straight-line Method: Accumulated Depreciation P6,800
Dec 31, 2025 Depreciation Expense P6,800 2021 2022 2023 2024 2025 2026
Cost P40,000 P40,000 P40,000 P40,000 P40,000
Accumulated Depreciation P6,800 P40,000
Accumulated
Depreciation Depreciation

2021 2022 2023 2024 2025 P6,000 P14,000 P22,000 P30,000 P38,000
Cost P40,000 P40,000 P40,000 P40,000 P40,000 P40,000
Accumulated
Depreciation Book Value P34,000 P26,000 P18,000 P10,000
P2,000 -
P6,800 P13,600 P20,400 P27,200 P34,000
Depreciation
Book Value P33,200 P26,400 P19,600 P12,800 Example 17:
P6,000 A company acquired an office equipment of
Example 15: P75,000 at the beginning of the
year. The equipment has an estimated useful life of
Depreciation 8 years and a salvage
Example 15: value of P3,000.
A company acquired a delivery van of P40,000 on
April 1, 2021. The van has Dec 31, 2021
an estimated useful life of 5 years and no salvage
value Depreciation Expense 9,000

Apr 1, 2021 Service Vehicle P40,000 Accumulated Dep 9,000

Cash P40,000 Depreciation

Example 18:
Depreciation A company acquired an office equipment of
Example 14: P75,000 on July 31, 2021. The
equipment has an estimated useful life of 8 years
Depreciation = 40,000 and a salvage value of
5 years P3,000.

Depreciation = P8,000 x 9/12 Dec 31, 2021

December 31, 2021 Depreciation Expense 3,750

Depreciation Expense P6,000
Accumulated Dep 3,750
Depreciation = P6,000
Depreciation
Accumulated Depreciation P6,000 Example 19:
A company acquired an office equipment of
Depreciation P120,000 on March 1, 2021. The
Example 15: van has an estimated useful life of 6 years and a
Dec 31, 2021 Depreciation Expense P6,000 salvage value of P15,000.
The company uses fiscal year and the end of their
Accumulated Depreciation P6,000 accounting period is
November 30, 2021.
Dec 31, 2022- Depreciation Expense P8,000
2025 Accumulated Depreciation P8,000 Nov 30, 2021
Mar 31, 2026 Depreciation Expense P2,000
Depreciation Expense P13,125
Accumulated Depreciation P2,000
Accumulated Depreciation P13,125
(P8,000* 3/12) 3 mos from Jan 1 to Mar 31, 2026
Types of Adjusting Journal Entries
Depreciation
Example 16: Accruals Deferrals
 Less: Allow for Bad Debts 6,000
Depreciation Allowance for NRV P294,000
Bad Debts
Illustration
Adjusting
Journal Entries Chinky Enterprise’s financial report shows a debit
balance of account
Allowance for Bad Debts receivable amounting to P96,000. Allowance for
doubtful accounts is set up
Accounts receivable should be presented in the at 5% of accounts receivable.
balance sheet at net
realizable value, the most probable amount that the Adjusting Journal Entry
company will be able to Dec 31 Doubtful Accounts Expense P4,800
collect.
Net Realizable Value (NRV) – the amount reported Allowance for Doubtful Accounts P4,800
in the balance sheet which is the
difference between Accounts Receivable and
Allowance for Doubtful Accounts.

Accounts Receivable (Gross) PXXX

Less: Allowance for Doubtful Accounts (XXX)
Net Realizable Value PXXX

Allowance for Bad Debts

Proforma Adjusting Entry:

1. Doubtful Accounts Expense XXX

Allowance for Doubtful Accounts XXX

2. Bad Debts Expense XXX

Allowance for Bad Debts XXX

3. Uncollectible Accounts Expense XXX

Allowance for Uncollectible Accounts XXX

Illustration

Assume that Company ABC uses past experience

to estimate that 2% of all
accounts receivable are uncollectible. (i.e., bad
debt expense). During 2021
the company had P300,000 accounts receivable
balance.

Adjusting Journal Entry

Dec 31 Bad Debts Expense P6,000

Allowance for Bad Debts P6,000

Percentage of Receivables
Assume that Company ABC has the following
balances at the end of the
period before adjustments. What is the net
realizable value of the receivable
for 2021?

Accounts Receivable P300,000