Unit 6

Adjusting Entries and Adjusted Trial Balance

Adjusting Entries

At the end of the accounting period, the company may have some unrecognized income or
expenses or some mistakes in the books. To update and to bring the balances of the
accounts to their appropriate amounts, adjusting entries would be necessary.

In simple terms, adjusting entries work to fix something in the books of the company. This
is done to facilitate the preparation of faithfully represented financial information that will
be used by the various users of said information. This is the 4th step in the accounting
process.

I. Accruals
Accruals are items for adjustments that have already been incurred (expenses) or have
already been earned (income) but have not been paid or received. Examples would be
interest expense, salaries expense, and utilities expense.
➢ Salaries and utilities expense
Example:
a. “At the end of the accounting period it was ascertained that salaries
amounting to ₱10,000 was not reflected in the records and was still unpaid.”

Since there is an unrecorded expense, it is just proper to reflect it on the records

of the company. Hence, an expense account must be debited. Also, since the
expense was not yet paid, a liability has to be credited.

Adjusting entry:

Salaries Expense 10,000

Salaries Payable 10,000

You may use “accrued salaries expense” as your liability account instead of
“salaries payable” depending on what is on the chart of accounts.

b. “Water, electricity and internet bills that have already been paid were not
recorded on the books by the bookkeeper. Total amount paid was ₱11,000 ”

An expense account has to be recorded on the debit side because it was not
recorded by the bookkeeper. Since it was already paid, you just have to record
the outflow of cash and NOT a liability.

Adjusting entry:

Utilities Expense 11,000

Cash 11,000

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 ➢ Interest Expense/ Interest Income

An interest can either be an income or an expense depending on whose

perspective we deal with—the debtor or the creditor.

The DEBTOR or BORROWER incurs the interest expense and has to pay for it.

The CREDITOR or LENDER earns the interest income and can collect it.

Interest is computed as:

I = Principal x rate x time OR I=P x R x T

Principal is the original amount of loan/borrowing while rate is the applicable

interest rate for the loan. Time is the period from when the money is borrowed
up to the time the adjusting entry is prepared (usually year-end).

Example:
a. Borrower’s point of view

“A 2-year loan of ₱500,000 was obtained from the bank on January 2, 2019. The
bank charges an interest of 10% of the principal. At year-end (December 31,
2019), no interest payment was made.”

The length of time can just be considered as 1 year because the loan was
obtained on January 2 and the accounting period ends on December 31.
Therefore:

I = 500,000 x 10% x 1
I = 50,000 x 1
I = 50,000

There can be no interest expense/ interest income WITHOUT passage of

time. In this case there is passage of time which is 1 year (from January 2 until
December 31).

Since an expense has been incurred running from January 2 until December 29,
there should be a debit entry for interest expense. A liability is recognized in
the credit side since there is an increase in the liability brought about by non-
payment of interest dues at year-end.

Adjusting entry:

Interest Expense 50,000

Interest Payable 50,000

You may use “accrued interest expense” as your liability account instead of
“interest payable” depending on what is on the chart of accounts.

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 WHAT IF THE LOAN WAS OBTAINED ON A DATE OTHER THAN JANUARY?

Assuming the loan was obtained on March 31, the computation would be:

I = 500,000 x 10% x (9/12)

I = 50,000 x (9/12)
I = 37,500

The “9/12” stands for the 9 months running from March 31 or April 1 until
December 31.

Assuming the loan was obtained on March 1, the computation would be:

I = 500,000 x 10% x (10/12)

I = 50,000 x (10/12)
I = 41,667

The “10/12” stands for the 10 months running from March 1 until December
31.

b. Creditor’s/ Lender’s point of view

Using the same problem but assuming that you are the lender/ creditor, the
computation of interest income will still be the same as that of interest expense.
Only the account title in the adjusting entries will be different.

Adjusting entry:

Interest receivable 50,000

Interest Income 50,000

The payable of the borrower is the receivable of the lender/ creditor. The
expense of the borrower is the income of the lender/ creditor. Therefore, in this
case, the interest becomes the income of the lender. Since no payment was
made yet, it also becomes an asset of the lender/ creditor in the form of interest
receivable.

You may use “accrued interest income” instead of “interest receivable”

depending on what is on the chart of accounts.

II. Deferrals

Deferrals involve expenses already paid in ADVANCE but not yet incurred and
income already received/ collected in ADVANCE but not yet earned.

To summarize the definition above, we can use “prepayments” and “pre-collections”.

➢ Prepayments

A. Asset Method

When “Asset Method” is used, it means that a “prepaid” account is debited

as an asset in originally recording the transaction in the journal. NO
expense is recorded yet in this case during the preparation of the original
journal entry.

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 When the adjusting entries are prepared, you shall be looking for the
“expired” or “expensed” portion of the asset previously recognized.

Example:

“A 1-year rent for the commercial space was paid in advance on August 1 for
₱120,000. The company’s accounting period ends on December 31.”

Asset Method (original entry):

Prepaid Rent 120,000

Cash 120,000

Asset Method (adjusting entry):

Rent Expense 50,000

Prepaid Rent 50,000

Analysis:

The monthly rent is ₱10,000 since the payment is good for 1 year (12 months).
We simply divide ₱120,000 by 12 months to get the ₱10,000 figure.

Asset portion (unused/unexpired) 70,000

120,000
Expense portion (used/expired) 50,000

Since it was paid on August 1, it means that it was only used for 5 months
during the year (August 1-December 31). The expense to be recognized is only
up to the extent that it was used. Therefore, the expense should only be for 5
months. We multiply ₱10,000 by 5 months and it will give us ₱50,000. This
means that the asset portion is only ₱70,000 at the end of the year because the
₱50,000 has already been used.

Remember that the ₱120,000 was originally recorded as an asset. By the end of
the year, the asset is no longer valued at the same amount because part of it has
already been used. So in the adjusting entry, the asset account called “Prepaid
Rent” will decrease and will be positioned on the credit side. On the other
hand, since no expense was recorded yet, we have to record it on the debit side.

After posting the adjusting entry, it will bring the balance of prepaid rent from
₱120,000 to only ₱70,000 which is computed by deducting ₱50,000 from
₱120,000. Rent expense will have a balance from zero (0) to ₱50,000 since it
has just been recorded.

B. Expense Method

When “Expense Method” is used, it means that an expense account is

debited in originally recording the transaction in the journal. NO asset is
recorded yet in this case during the preparation of the original journal entry.

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 When the adjusting entries are prepared, you shall be looking for the
“unexpired” or “asset” portion of the expense previously recognized.

Example:

“A 1-year rent for the commercial space was paid in advance on August 1 for
₱120,000. The company’s accounting period ends on December 31.”

Expense Method (original entry):

Rent Expense 120,000

Cash 120,000

Expense Method (adjusting entry):

Prepaid Rent 70,000

Rent Expense 70,000

Analysis:

The monthly rent is ₱10,000 since the payment is good for 1 year (12 months).
We simply divide ₱120,000 by 12 months to get the ₱10,000 figure.

Asset portion (unused/unexpired) 70,000

120,000
Expense portion (used/expired) 50,000

Since it was paid on August 1, it means that it was only used for 5 months
during the year (August 1-December 31). The expense to be recognized is only
up to the extent that it was used. Therefore, the expense should have been
₱50,000 only and not the entire ₱120,000.

Remember that the ₱120,000 was originally recorded as an expense in full. So

in the adjusting entry at the end of the year, the Rent Expense account should
decrease by ₱70,000 by putting it on the credit side. On the other hand, an
asset account shall be recorded on the debit side because it was not recognized
originally.

After posting the adjusting entry, it will bring the balance of prepaid rent from
zero (0) to ₱70,000 since it has just been recorded. The balance of rent expense
will be reduced from ₱120,000 to only ₱50,000 which is computed by
deducting ₱70,000 from ₱120,000.

Whether you use asset or expense method, the resulting figures for the asset
and expense portions after the adjustments would be the same.

➢ Pre-collections

A. Income Method

When income method is used, it means that the money collected in advance
is recorded as an income in full even if it is not yet earned and NO liability
is recorded yet in this case in the original journal entry.

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 When adjusting entries are prepared, you shall be looking for the
“unearned” or “liability” portion of the money previously recognized
entirely as an income.

Example:

“On November 15, a sum of ₱25,000 was received in advance for services to be
rendered at some future dates. At year-end, only ₱15,000 worth of service has
been rendered to the client.”
Income Method (original entry):

Cash 25,000
Service Income 25,000

Income Method (adjusting entry):

Service Income 10,000

Unearned Service Income 10,000

Analysis:

In the original journal entry, cash is debited since the business has received
money as an advance payment. Since you are using the income method, service
income account is credited.

The income that should appear on the records should be the one representing
the service already rendered. Since only ₱15,000 was rendered, that should
only be the amount for the service income. However, the company recorded an
income of ₱25,000. To fix this, the adjusting entry must show the service
income being reduced by ₱10,000 to make it ₱15,000 only.

Income portion (earned) 15,000

25,000
Liability portion (unearned) 10,000

Accordingly, when income is reduced, it has to be placed on the debit side

since its normal balance is credit.

After receiving cash in advance, there is a liability on the part of the company to
render service/s. Since the company only rendered partial services for ₱15,000,
there is still an unrecorded liability called “unearned service income”
amounting to ₱10,000. To reflect this, the adjusting entry must show this
account on the credit side.

B. Liability Method

When liability method is used, it means that the money collected in advance
is recorded as a liability in full and NO income is recorded yet in this case
in the original journal entry.

When adjusting entries are prepared, you shall be looking for the “earned”
or “income” portion of the money previously recognized entirely as a
liability.

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 Example:

“On November 15, a sum of ₱25,000 was received in advance for services to be
rendered at some future dates. At year-end, only ₱15,000 worth of service has
been rendered to the client.”

Liability Method (original entry):

Cash 25,000
Unearned Service Income 25,000

Liability Method (adjusting entry):

Unearned Service Income 15,000

Service Income 15,000

Analysis:

The service income amounting to ₱15,000 is reflected in the adjusting entry on

the credit side because it was not shown in the original journal entry.
Remember that income items are normally placed on the credit side.

The unearned service income which is a liability is debited in the adjusting

entry because it has decreased after rendering the service worth ₱15,000.

Income portion (earned) 15,000

25,000
Liability portion (unearned) 10,000

When the adjusting entries are posted, the service income account will show
a balance of ₱15,000 while the unearned service income account will show
₱10,000.

Whether you use income or liability method, the resulting figures for the
income and liability portions after the adjustments would be the same.

III. Depreciation

Depreciation refers to the decrease in the value of a physical asset over its
useful life because of wear and tear. Through depreciation, the cost of the
depreciable physical asset is allocated over its useful life.

Depreciation is normally computed for assets like building, machinery,

equipment, furniture and fixture. LAND, however, is not subjected to
depreciation because its value increases over time.

The most basic computation of depreciation is through the “Straight Line

Method”. It is done this way:

Depreciation = (cost – salvage value) / estimated useful life

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 Cost includes the asset’s purchase price, shipping cost or freight, installation
costs, testing cost, etc.

Salvage value or residual value is the expected value to be received when an

asset is sold at the end of its useful life.

The difference between cost and salvage value is called the depreciable
amount.

The pro-forma entry to record depreciation expense is shown below:

Depreciation expense xx
Accumulated Depreciation xx

Since depreciation is an expense, it is placed on the debit side. The

“Accumulated Depreciation” account is a contra-asset account and has a
normal balance of credit.

Example:

a. “A machine costing ₱50,000 with a salvage value of ₱5,000 was purchased at

the beginning of the year. Useful life is 9 years. The company’s accounting
period ends on December 31.”

Below is the computation:

Depreciation = (50,000 – 5,000) / 9

= 45,000 / 9
= 5,000 per year

Since the machine was purchased at the beginning of the year, the depreciation
will be for the whole year (12 months). Note that the divisor is expressed in
terms of years.

Adjusting entry:

Depreciation Expense 5,000

Accumulated Depreciation- machinery 5,000

WHAT IF THE MACHINE WAS ACQUIRED ON ANOTHER DATE?

*Assuming the machine was acquired on May 1, the computation would be:

Depreciation = {(50,000 – 5,000) / 9} x (8/12)

= (45,000 / 9) x (8/12)
= 5,000 x (8/12)
= 3,333

The “8/12” is for the 8-month period running from May 1 until December 31.
The 5,000 is an annual (1 year) depreciation. Since the asset was acquired only
on May 1, the asset shall only be depreciated for 8 months during the first year.
This brings the solution to multiply 5,000 with 8/12.

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 On the next accounting period, when the asset is used for the whole year, the
depreciation expense will be ₱5,000 which is good for 1 year (12 months).

*Assuming the machine was acquired on May 31, the computation would be:

Depreciation = {(50,000 – 5,000) / 9} x (7/12)

= (45,000 / 9) x (7/12)
= 5,000 x (7/12)
= 2,917

The “7/12” is for the 7-month period that runs from June 1 until December 31.
This is so because the asset was bought on May 31. You start with the next
month which is June.

The difference between the cost of the depreciable asset and its related
accumulated depreciation is called “book value” or “carrying value”

If the cost is ₱50,000 and the accumulated depreciation is ₱5,000, the carrying
value at the end of the year is ₱45,000.

The accumulated depreciation increases over the years except if the asset is
sold or is already fully depreciated. As the accumulated depreciation
increases, the book value of the asset decreases. The decrease in the book
value happens because the accumulated depreciation is deducted from the cost
of the asset.

IV. Doubtful Accounts

Doubtful Accounts represent the portion of accounts receivable that may not
be collected in the future.

We have to put emphasis on the word “doubtful”. This means that the chance of
having the accounts receivable uncollected is not really absolute. There is a
chance of it being collected and a chance of not being collected.

The pro-forma entry to record doubtful accounts expense is shown below:

Doubtful Accounts Expense xx

Allowance for Doubtful Accounts xx

Allowance for Doubtful Accounts, just like Accumulated Depreciation, is a

contra-asset account whose normal balance is credit.

Example:

a. “At the end of the accounting period, an accounts receivable worth ₱8,000 is
estimated to be doubtful of collection.”

Adjusting entry:

Doubtful Accounts Expense 8,000

Allowance for Doubtful Accounts 8,000

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 The difference between the face value of the accounts receivable and its
related allowance for doubtful accounts is called “NRV” or “net realizable
value”.

If the face value is ₱70,000 and the allowance for doubtful accounts is ₱8,000,
the NRV at the end of the year is ₱62,000.

V. Supplies

Preparing the adjusting entries for supplies are the same as that of prepayments. It is
also sub-divided into two: Asset Method and Expense Method.

A. Asset Method

When “Asset Method” is used, it means that “supplies” account is debited

as an asset in originally recording the transaction in the journal. NO
expense is recorded yet in this case during the preparation of the original
journal entry.

When the adjusting entries are prepared, you shall be looking for the
“expired” or “expensed” portion of the asset previously recognized. The
expense portion is called “supplies expense”.

Example:

“A ₱16,000 worth of supplies were bought on a cash basis on November. On

December 31, on the company’s year-end, remaining supplies amounted to
₱3,000.”

Asset Method (original entry):

Supplies 16,000
Cash 16,000

Asset Method (adjusting entry):

Supplies Expense 13,000

Supplies 13,000

Analysis:

In the original entry, the entire ₱16,000 was debited to an asset called
“supplies” and cash account was credited because the purchase was made on
cash basis.

By the end of the year, the ₱13,000 worth of supplies were already consumed/
used and is already part of expense since only ₱3,000 supplies remained on
hand.

Asset portion (unused/unexpired) 3,000

16,000
Expense portion (used/expired) 13,000

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 Since the entire ₱16,000 was recognized as an asset under “supplies”, such
account shall be reduced by ₱13,000 to show that only ₱3,000 supplies remain.
Therefore, supplies must be credited in the adjusting entry.

Expense has already been incurred because parts of the supplies were already
used. But since no expense account has been recorded yet, “supplies expense”
has to be debited in the adjusting entry.

When the adjusting entries are posted, it will show that the asset portion is
only ₱3,000 while the expense portion is ₱13,000.

B. Expense Method

When “Expense Method” is used, it means that “supplies expense” account

is debited in originally recording the transaction in the journal. NO asset
portion is recorded yet in this case during the preparation of the original
journal entry.

When the adjusting entries are prepared, you shall be looking for the
“unexpired/unused” or “asset” portion of the item previously recognized.
The asset portion is called “supplies” or “office supplies” depending on
what is on the chart of accounts.

Example:

“A ₱16,000 worth of supplies were bought on a cash basis on November. On

December 31, the company’s year-end, the remaining supplies amounted to
₱3,000.”

Expense Method (original entry):

Supplies Expense 16,000

Cash 16,000

Expense Method (adjusting entry):

Supplies 3,000
Supplies Expense 3,000

Analysis:

In the original entry, the entire ₱16,000 was debited to an expense called
“supplies expense” and cash account was credited because the purchase was
made on cash basis.

Asset portion (unused/unexpired) 3,000

16,000
Expense portion (used/expired) 13,000

FABM1-006 Page 11 of 17
 By the end of the year, only ₱13,000 worth of supplies will be part of the
expense since there were still ₱3,000 supplies that remained unused.
However, the company has recorded expense for the full amount of ₱16,000. To
fix this, the supplies expense account has to be decreased by putting it on the
credit side.

Since there are still few supplies that remain but were not yet recorded as an
asset, the adjusting entry should provide for a debit entry to “supplies” account.

When the adjusting entries are posted, it will reflect that the supplies expense
account has a balance of ₱13,000 and the asset is only ₱3,000.

Whether you use asset or expense method in accounting for supplies, the
balances at the end of the period for both the asset portion and expense portion
will be the same.

Illustrative Problem:

Continuing the problem set from Mireio Motor Servicing, consider the additional
information below and the Unadjusted Trial Balance found on page 40 to guide you in
preparing adjusting entries at the end of January.

Additional information:

a. Salaries of employees for the month of January worth ₱12,000 were unrecorded
and unpaid.
b. Taxes and licenses amounting to ₱13,000 were not recorded but were already
paid.
c. Supplies remaining on hand at month-end amount to only ₱1,000. The business uses
asset method in accounting for supplies.
d. As a company policy, depreciable assets acquired within the 1 st fifteen (15) days are
depreciated as if they were acquired on the 1st day of the month. Acquisitions falling
within
the 2nd fifteen (15) days of the month shall be depreciated as if they were bought on
the last day of the month. Accordingly, the Straight Line Method is used for
depreciation purposes.

❖ The machine has a useful life of 10 years with a ₱5,000 salvage value.
❖ The equipment has a useful life of 8 years with a ₱3,000 salvage value.

e. The loan bears interest at 10% per year.

ADJUSTING ENTRIES:

a. Salaries Expense 12,000

Salaries Payable 12,000

The expense account is simply debited since no salaries expense was recorded
before (see the UNADJUSTED TRIAL BALANCE). On the other hand, a liability
account is credited since the expense was both unrecorded and unpaid.

b. Taxes and Licenses 13,000

Cash 13,000

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 The expense account is simply debited since no taxes and licenses were recorded
before (see the UNADJUSTED TRIAL BALANCE). On the other hand, the cash account
is credited since the expense was already paid.

c. Supplies Expense 4,000

Supplies 4,000

Note that the company uses asset method wherein the entire supplies purchased were
recorded as part of assets. In the UNADJUSTED TRIAL BALANCE, the supplies
account has a balance of ₱5,000. The problem mentioned that only ₱1,000 remained so
that means that ₱4,000 supplies were already used. When supplies are used, they
become part of expenses and the level of assets decreases. Therefore, supplies
expense will be ₱4,000 and the decrease in asset is the same. To reflect the increase
in expense, it should be debited. To show the decrease in asset, the account should
be credited.

d. Depreciation expense 250

Accumulated Depreciation- Machinery 250

The computation is done below:

Depreciation = {(35,000 - 5,000) / 10} x (1/ 12)

= (30,000/10) x (1/12)
= 3,000 x .083333333333
= 250

Refer to the UNADJUSTED TRIAL BALANCE to see the cost of the machinery.

When you divide ₱30,000 by 10 years, the quotient of ₱3,000 is an annual (1 year)
depreciation. Since the required adjustments are for the month of January only, you
have to multiply the ₱3,000 by 1/12 so that you can get the depreciation for 1
month. That gives us ₱250 depreciation expense per month.

Even if the machine was not used for 1 whole month (since it was purchased on
January 13), the depreciation to be recorded is still for 1 whole month because it is the
company’s policy to depreciate the asset as if it was purchased at the beginning of the
month.

Depreciation expense 125

Accumulated Depreciation- Equipment 125

The computation is done below:

Depreciation = {(15,000- 3,000) / 8} x (1/12)

= (12,000/8) x (1/12)
= 1,500 x .083333333333
= 125

Refer to the UNADJUSTED TRIAL BALANCE to see the cost of the equipment.

When you divide ₱12,000 by 8 years, the quotient of ₱1,500 is an annual (1 year)
depreciation. Since the required adjustments are for the month of January only, you

FABM1-006 Page 13 of 17
 have to multiply the ₱1,500 by 1/12 so that you can get the depreciation for 1
month. That gives us ₱125 depreciation expense per month.

Even if the equipment was not used for 1 whole month (since it was purchased on
January 14), the depreciation to be recorded is still for 1 whole month because it is the
company’s policy to depreciate the asset as if it was purchased at the beginning of the
month.

e. There will be NO ADJUSTING ENTRY for the interest related to the loan at the end of
January because the loan was obtained at the end of January itself. Remember that
there is NO interest without passage of time.

Adjusted Trial Balance

The preparation of an adjusted trial balance uses its unadjusted version and the adjusting
entries. The format, rules, and arrangement of the account titles are just the same for both
the unadjusted and the adjusted trial balance. This is the 5th step in the accounting process.

The adjusted trial balance contains the adjusted amounts of the accounts. The adjusted
accounts will be used in preparing the financial statements.

In preparing this, you need to consider the following:

a. There are account titles appearing on the adjusting entries but are not present in
the unadjusted trial balance. If this is the case, you simply have to insert them on
the body of the adjusted trial balance. The amounts of such accounts shall be
placed on the trial balance (either debit or credit) based on their position in the
adjusting entries. Therefore, if the account title appears on the debit side of the
adjusting entry, its amount shall also be positioned on the debit side when
transferred to the adjusted trial balance.

b. There are account titles appearing on the unadjusted trial balance but are not
affected or not present in the adjusting entries. In this case, you will do nothing to
them. These accounts will simply be carried over to the adjusted trial balance as is.
If the account is originally from the debit or credit side, it will still be on the same
side.

c. There are account titles appearing on both the adjusting entries and on the
unadjusted trial balance. If this is the case, you just have to compare the position/
placement of that account from both sources.

If the account appears on the same side (debit/credit) from both the adjusting
entries and unadjusted trial balance, that means that you will add the amounts then
transfer their sum to the adjusted trial balance on the same side.

If the account title appears on opposite sides from the adjusting entries and
unadjusted trial balance (debit on the adjusting entries and credit on the unadjusted
trial balance, vice versa), that means that you will subtract the amounts then
transfer their difference to the adjusted trial balance on the side with the greater
amount.

FABM1-006 Page 14 of 17
 Example: (c.1)

“On the unadjusted trial balance, the unearned service income account
appears on the credit side @ ₱50,000. Meanwhile, the adjusting entries also
show the same account on the credit side @ ₱15,000”.

Since the accounts are the same (both are unearned service income) and since
both sources have placed the account on the credit side, you just have to add their
amounts. The sum would be ₱65,000 and will be the adjusted amount. The
adjusted amount shall be written on the credit side of the adjusted trial balance.
Therefore, the unearned service income account will be shown on the credit side
of the adjusted trial balance @ ₱65,000.

Example: (c.2)

“On the unadjusted trial balance, the supplies account appears on the debit
side @ ₱10,000. Meanwhile, the adjusting entries show supplies account on
the credit side @ ₱6,000”.

Since the accounts are the same (both are supplies) but are positioned differently,
you just have to subtract their amounts. The difference would be ₱4,000 and will be
the adjusted amount. The adjusted amount shall be written on the debit side of
the adjusted trial balance because the debit side has the bigger amount
(₱10,000). Remember that we should follow the side with the greater figure.
Therefore, the supplies account will be shown on the debit side of the adjusted
trial balance @ ₱4,000.

Illustrative Problem:

Continuing the problem set from Mireio Motor Servicing, you may now prepare the
ADJUSTED TRIAL BALANCE at the end of January. The guide will be the unadjusted trial
balance from page 40 and the adjusting entries from pages 54-55.

Step 1: Identify the account titles appearing on the adjusting entries but are not present in
the unadjusted trial balance and note their positions and amounts.

Account titles Debit (dr) Credit (cr)

Salaries Expense 12,000

Salaries Payable 12,000
Taxes and Licenses 13,000
Supplies Expense 4,000
Depreciation Expense*** 375
Accumulated Depreciation - Machinery 250
Accumulated Depreciation - Equipment 125

***The amount of ₱375 for depreciation expense was computed by adding the
depreciation expense of machinery (₱250) and equipment (₱125).

These accounts will simply be inserted on the body of the adjusted trial balance with
their corresponding amounts on their respective positions.

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Step 2: Identify the account titles appearing on the unadjusted trial balance but are not
affected or not present in the adjusting entries and note their positions and amounts.

Account titles Debit (dr) Credit (cr)

Prepaid Insurance 500,000

Machinery 35,000
Office Equipment 15,000
Accounts Payable 5,000
Loans Payable 800,000
M., Capital 1,000,000
M., Drawing 25,000
Service Revenue 45,000
Utilities Expense 3,000

These accounts will simply be carried over to the adjusted trial balance as is
because they are not affected in any way. If the account is originally from the debit
or credit side, it will still be on the same side on the adjusted trial balance.

Step 3: Identify the account titles appearing on both the adjusting entries and on the
unadjusted trial balance. Note their position and amounts.

ACCOUNT TITLES Unadjusted Trial Balance Adjusting Entries

debit credit debit credit

Cash 1,267,000 13,000

Supplies 5,000 4,000

These accounts appear on both sources with opposite positions on each source. You
simply have to subtract the amounts per account then transfer the difference to the
adjusted trial balance.

For cash, the difference will be ₱1,254,000 (computed as ₱1,267,000 dr – ₱13,000

cr). Its position on the adjusted trial balance will be on the debit side since the
debit amount is bigger than the credit amount.

For supplies, the difference will be ₱1,000 (computed as ₱5,000 dr – ₱4,000 cr). Its
position on the adjusted trial balance will be on the debit side since the debit
amount is bigger than the credit amount.

Step 4: Summarize and arrange the accounts accordingly with their amounts in their
respective positions. Observe proper format.

FABM1-006 Page 16 of 17
 MIREIO MOTOR SERVICING
Adjusted Trial Balance
January 31, 2020

PARTICULARS Debit Credit

Cash 1,254,000
Prepaid Insurance 500,000
Supplies 1,000
Machinery 35,000
Accumulated Depreciation- Machinery 250
Office Equipment 15,000
Accumulated Depreciation- Office Equipment 125
Accounts Payable 5,000
Salaries payable 12,000
Loans Payable 800,000

M., Capital 1,000,000

M., Drawing 25,000
Service Revenue 45,000
Utilities Expense 3,000
Salaries Expense 12,000
Taxes and Licenses 13,000
Supplies Expense 4,000
Depreciation Expense 375
1,862,375 1,862,375

Notice that the contra asset accounts (accumulated depreciation) are written
right below the related asset. Being contra assets, their balances are found on the
credit side.

Reference:

HBL Module by Chavez & Malquisto

********** Nothing Follows**********

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