ADJUSTING ENTRIES
• Adjusting entries are journal entries made at the end of the
accounting period to update the balances of some accounts in
order to present more fairly and more accurately the results of
operations and financial condition of the business
• adjustments used to bring the assets, liabilities, revenues and
expenses up-to-date at the end of accounting period
• prepared at the end of accounting period
Types of Adjusting Entries
1. Adjusting entries to take up provisions for bad debts
2. Adjusting entry to take up provisions for depreciation
3. Prepayment of expenses
4. Precollection of income
Provision for Bad Debts
• Bad debts are losses from uncollectible accounts receivable
• Journal entry:
Bad Debts Expense xxx
Allowance for Bad Debts xxx
• Accounting treatment:
Bad Debts Expense – recorded as operating expense
Allowance for Bad Debts – recorded as contra asset account
Method of Estimating Bad Debts
• A certain percent of Accounts • A certain percent of Service
Receivable Income
Accounts Receivable xxx Service Income xxx
x Rate of loss % x Rate of loss %
Required Allowance xxx Bad Debts Expense xxx
Less: Recorded Allowance xxx
Bad Debts Expense xxx
Exercise 1
The following accounts appear in the ledger of Diana Repair Shop before adjustments were
made on December 31, 2014;
Accounts Receivable 150,000
Allowance for Bad Debts 2,000
Service Income 600,000
Required:
Compute the bad debts expense and give the corresponding entry for each assumption below;
a. It is estimated that the allowance be increased by 1% of Service Income.
b. It is estimated that the allowance should be increased to 3% of accounts receivable.
c. It is estimated that the allowance for bad debts is equal to 4% of outstanding accounts
receivable
d. It is estimated that ½ of 1 % of Service Income deemed uncollectible.
Depreciation
• Depreciation- is the portion of the cost or other basic value of a
tangible capital asset allocated or charged as expense during an
accounting period.
• Factors of depreciation:
a. Depreciation base
b. Scrap value
c. Estimated useful life
• The simplest and frequently used method of depreciation is called
the straight line method.
• Formula:
Depreciation per year = (Cost - Scrap Value)/Estimated Life
• Journal Entry:
Depreciation Expense xxx
Accumulated Depreciation xxx
• Accounting Treatment:
Depreciation – recorded as Operating Expense
Accumulated Depreciation – recorded as Contra-asset account
Exercise 2
• For each case below, compute the depreciation expense for the
year ending December 31, 2014 and give the corresponding
adjusting entry;
a. Furnitures costing P24,000 were acquired on October 1, 2012. It
has an estimated life of 5 years and a scrap value of P4,000
b. A building was constructed on January 1, 2013 at a cost of
P260,000 with an estimated life of 20 years and a scrap value of
P 20,000.
c. Equipment costing P90,000 with an estimated life of 10 years
and a scrap value of P10,000 were acquired on October 1, 2014
Prepayment
• Prepaid expense is an economic benefit that has been paid for in
advance of its use. At the time of payment, an asset is acquired
that will expire or be used up and it becomes an expense
• Two methods that can be used:
a. Asset method. Under this method, the original entry made is charged to
an asset account. At the end of the period, the expense portion is set
up.
b. Expense method. Under this method, expense account is charged
when payment is made. At the end of the period, the asset portion is set
up
Exercise 3
Prepare the journal entries on the following transactions:
Jun 15 Office supplies bought, P9,000 3/4 was used on Dec 31
Jul 1 Insurance premiums for two years paid, P9,000
Aug 1 Paid 6-month rent, P24,000
Sep1 Paid two-year advertising, P3,600.
Dec1 Paid a 4-month interest on notes payable, P240.
Exercise 4
The following account balances were taken from the ledger of Lorraine Advertising Agency on December
31, 2014 prior to adjustments:
Supplies on Hand 1,800
Prepaid Advertising 2,400
Rent Expense 12,000
Interest Expense 180
An investigation on December 31, 2014 revealed the following additional information;
a) Prepaid interest, P 80.
b) A physical count on December 31 showed that there are supplies used amounting to P1,000.
c) The business entered into a 4-month advertising contract on December 1, 2014 which required an advance
payment of P2,400.
d) Rent expense, P 7,000.
Required: Give the adjusting entries on December 31, 2014
Precollection
• Precollected/Unearned/Deferred Incomes are items representing
some cash or property received, the earnings or realization of
which covers a period extending the current or present period.
• These are also called deferred credits. Income collected in
advance maybe recorded originally to a liability or real account, or
to an income or nominal account.
• At the end of the accounting period, the precollected incomes are
divided into their component liability (real) and income(nominal)
elements by means of adjusting entries.
• In the adjusting process, the liability must be presented by a real
account title and the income portion by a nominal account title.
Exercise 6
Determine the real portion and the nominal portion of the following
transactions:
Dec. 1 – The owner of a building receives rental from a tenant , P
4,500, corresponding to three months rent.
Dec. 16- Collected the interest of a 60-day, 12% note from a
customer. The face value of the note is P9,000.
Required: Record the transactions above using the nominal
account method and give the adjusting entries on December 31,
2014.
THANK YOU
