Adjusting Entries Adjusting Entries • • It brings records or balances up-to-date Prepared at the end of the accounting period Adjusting Entries • • • • Accruals Deferrals Depreciation Provision for Bad Debts Accruals • Accrued Income • Accrued Expense Accruals • Accrued Income • • Earned but not yet collected Treated as asset since there is a receivable Accruals • Accrued Expense • • Incurred but not yet paid Treated as liability since there is a payable Accrued Income Developers Inc. owns a property that rents out hotels at a monthly rate of P500,000 payable every 5th of the following month. The rental for December 2020 will be received in January 5, 2021. Assume that Dec. 31, 2020 is the end of the accounting period. DATE Dec. PARTICULARS 31 Accrued Rent Income Rent Income DEBIT CREDIT 500,000 500,000 Accrued Income Interest on notes receivable in the amount of P51,000 have accrued on December 31. DATE Dec. PARTICULARS 31 Accrued Interest Receivable Interest Income DEBIT CREDIT 51,000 51,000 Accrued Expense Metro Hotels rent on a property at a monthly rate of P500,000 payable every 5th of the following month. The rental for December 2020 will be paid on January 5, 2021. End of the period is Dec. 31, 2020. DATE Dec. PARTICULARS 31 Rent Expense Accrued Rent Expense DEBIT CREDIT 500,000 500,000 Accrued Expense Interest on notes payable in the amount of P51,000 have accrued on December 31. DATE Dec. PARTICULARS 31 Interest Expense Accrued Interest Expense DEBIT CREDIT 51,000 51,000 Deferrals • Prepaids (or pre-payments) • Pre-collections Prepaids • Already paid but not yet incurred • Either expense method or asset method Original entry is a record to an EXPENSE Original entry is a record to an ASSET Prepaids On September 1, 2020, AVN Commercial paid an insurance premium covering the period from Sep. 1, 2020 – Sep. 1, 2021 amounting to P3,600. Accounting period ends on Dec. 31, 2020. Expense Method DATE Sep. PARTICULARS 1 DEBIT Insurance Expense CREDIT 3,600 Cash DATE Dec. 3,600 PARTICULARS 31 Prepaid Insurance Insurance Expense DEBIT CREDIT 2,400 2,400 Prepaids On September 1, 2020, AVN Commercial paid an insurance premium covering the period from Sep. 1, 2020 – Sep. 1, 2021 amounting to P3,600. Accounting period ends on Dec. 31, 2020. Asset Method DATE Sep. PARTICULARS 1 DEBIT Prepaid Insurance CREDIT 3,600 Cash DATE Dec. 3,600 PARTICULARS 31 Insurance Expense Prepaid Insurance DEBIT CREDIT 1,200 1,200 Expense Method DATE Sep. PARTICULARS 1 DEBIT Insurance Expense CREDIT 3,600 Cash DATE Dec. 3,600 PARTICULARS 31 DEBIT Prepaid Insurance CREDIT 2,400 Insurance Expense 2,400 Asset Method DATE Sep. PARTICULARS 1 DEBIT Prepaid Insurance CREDIT 3,600 Cash DATE Dec. 3,600 PARTICULARS 31 Insurance Expense Prepaid Insurance DEBIT CREDIT 1,200 1,200 Pre-collections • Already collected but not yet earned • Either income method or liability method Original entry is a record to an INCOME Original entry is a record to a LIABILITY Pre-collections On October 1, 2020, TUP Realty Co. collected P12,000 from a tenant on advance collection from building rental for one year. Accounting period ends on Dec. 31, 2020. Income Method DATE Oct. PARTICULARS 1 DEBIT Cash CREDIT 12,000 Rent Income DATE Dec. PARTICULARS 31 Rent Income Unearned Rent Income 12,000 DEBIT CREDIT 9,000 9,000 Pre-collections On October 1, 2020, TUP Realty Co. collected P12,000 from a tenant on advance collection from building rental for one year. Accounting period ends on Dec. 31, 2020. Liability Method DATE Oct. PARTICULARS 1 DEBIT Cash CREDIT 12,000 Unearned Rent Income DATE Dec. PARTICULARS 31 Unearned Rent Income Rent Income 12,000 DEBIT CREDIT 3,000 3,000 Income Method DATE Oct. PARTICULARS 1 DEBIT Cash CREDIT 12,000 Rent Income DATE Dec. PARTICULARS 31 12,000 DEBIT Rent Income CREDIT 9,000 Unearned Rent Income 9,000 Liability Method DATE Oct. PARTICULARS 1 DEBIT Cash CREDIT 12,000 Unearned Rent Income DATE Dec. PARTICULARS 31 Unearned Rent Income Rent Income 12,000 DEBIT CREDIT 3,000 3,000 Depreciation • Straight-line Method: πΆππ π‘ ππ π΄π π ππ‘ − ππππ£πππ ππππ’π π΄πππ’ππ π·ππππππππ‘πππ = ππ πππ’π πΏπππ Depreciation A business acquired an office equipment for P80,000 in Oct. 1, 2020. Freight paid was P1,500 and installation cost P500. The estimated useful life is 5 years with a residual value of P10,000. (80,000 + 1,500 + 500) − 10,000 π΄πππ’ππ π·ππππππππ‘πππ = 5 π¦ππππ 82,000 − 10,000 π΄πππ’ππ π·ππππππππ‘πππ = 5 π¦ππππ π΄πππ’ππ π·ππππππππ‘πππ = 14,400 ππππ‘βππ¦ π·ππππππππ‘πππ = 1,200 Depreciation A business acquired an office equipment for P80,000 in Oct. 1, 2020. Freight paid was P1,500 and installation cost P500. The estimated useful life is 5 years with a residual value of P10,000. DATE Dec. PARTICULARS 31 Depreciation Expense Accrued Depreciation – O.E. DEBIT CREDIT 3,600 3,600 Provision for Bad Debts A business has outstanding accounts receivable from various customers amounting to P20,000. At the end of it accounting period, it is estimated that 5% of the accounts receivable is doubtful of collection. DATE Dec. PARTICULARS 31 Doubtful Accounts Allowance for Doubtful Accounts DEBIT CREDIT 1,000 1,000 Adjustments on Inventories Adjustments on Inventories • They are done on perpetual inventory system • When inventory balance does not conform to the physical inventory count. Inventory Balance: P50,000 Physical Inventory Count: P30,000 DATE Dec. PARTICULARS 31 Cost of Sales Merchandise Inventory DEBIT CREDIT 20,000 20,000 Inventory Balance: P50,000 Physical Inventory Count: P85,000 DATE Dec. PARTICULARS 31 Merchandise Inventory Cost of Sales DEBIT CREDIT 35,000 35,000 Reversing Entries Reversing Entries • Accruals • • Accrued Income Accrued Expense • Deferrals • • Prepaids (Expense Method) Pre-collections (Income Method) Reversing Entries Accrued Income DATE Dec. PARTICULARS 31 Accrued Rent Income DEBIT 500,000 Rent Income DATE Jan. PARTICULARS 1 Rent Income Accrued Rent Income CREDIT 500,000 DEBIT CREDIT 500,000 500,000 Reversing Entries Accrued Expense DATE Dec. PARTICULARS 31 DEBIT Interest Expense CREDIT 51,000 Accrued Interest Expense DATE Jan. PARTICULARS 1 Accrued Interest Expense Interest Expense 51,000 DEBIT CREDIT 51,000 51,000 Reversing Entries Prepaids (Expense Method) DATE Dec. PARTICULARS 31 DEBIT Prepaid Insurance CREDIT 2,400 Insurance Expense DATE Jan. PARTICULARS 1 Insurance Expense Prepaid Insurance 2,400 DEBIT CREDIT 2,400 2,400 Reversing Entries Pre-collections (Income Method) DATE Dec. PARTICULARS 31 DEBIT Rent Income CREDIT 9,000 Unearned Rent Income DATE Jan. PARTICULARS 1 Unearned Rent Income Rent Income 9,000 DEBIT CREDIT 9,000 9,000 TIPS ON IDENTIFYING METHODS 1. Methods are dependent on the original entries. 2. The account that has been deducted during adjusting is the method used. 3. If a Preliminary Trial Balance is given, the account that has a balance signifies the method used.
