Adjusting Entries (Accounting)

Adjusting Entries- Depreciation
Depreciation- pertains to the normal wear and tear of the non-current assets which are expected to be used for
more than one year such as: equipment, machineries, furniture and fixtures, building and vehicles. It is the
decline in value of depreciable assets on account of use and time.
Land is not depreciated because generally, its value continuously increases unless exceptional cases
were encountered.
Depreciation Expense
Adjusting journal entry:

Depreciation Expense – (Asset) XXX
Accumulated Depreciation- (Asset) XXX
 Depreciation Expense is an expense account to be presented in the Income Statement.
 Accumulated Depreciation is a contra-asset account* to be presented in the Balance Sheet.
*Contra-asset accounts show the cumulative decrease in value of a specific assets. It is usually presented in the
Balance Sheet right after the account in is attributable with.
Methods of Depreciation
1. Straight Line Method- It is the simplest and most common depreciation method. It assumes that
a constant amount is depreciated each year over the useful life of the property.
Formula:
Annual Depreciation= (Cost of Asset - Salvage Value)*/ Useful life
Salvage Value= is the estimated resale value of an asset at the end of its useful life. This is also called Residual
Value or Scrap Value.
*This is also known as the Depreciable Value (Depreciable Value = Cost of Asset – Salvage Value)
2. Double Declining Balance Method- The method in which the value of the product is seen to be higher in
the early years. This method uses a factor of two, when determining how much is written off each year.
Formula:
Annual Depreciation= 2 [(Cost of Asset - Salvage Value)/ Useful life]
3. Units of Production Method- This is usually used in depreciating machineries with high number of expected
production numbers.
Formula:
Depreciation Expense = (Number of Units Produced / Life in Number of Units) x (Cost - Salvage Cost).
4. Sum of the Years Digit Method (SYD)- This method assumes higher incurred depreciation in the early years
of the asset and lower incurred depreciation in the latter years.
Formula:
Depreciation Expense = (Remaining Life / Sum of the Years Digits) x (Cost - Salvage Value)
Carrying Value or Book Value
Carrying Value or Book Value represents the remaining value of the

asset subject for depreciation in the future.
Formula:
Carrying Value = Cost of the Asset - Accumulated Depreciation of the asset
Sample Problems:
1. On January 1, 2017, Sports World purchased a new cash register for P5,400. This register has a useful
life of 10 years and a residual value of P400.
1.1 Compute the depreciation expense, using Straight Line Method, for the year ended December 31
Annual Depreciation Expense = (Cost – Salvage Value) / Useful Life
= (P5,400 – P400) / 10 years
= P500
Adjusting entry:
12.31.2017 Depreciation Expense- Cash Register P500
Accum. Depreciation- Cash Register P500
a. For the year ended December 31, 2017, the Depreciation Expense – Cash Register P500.
b. As at the year ended December 31, 2017, Accumulated Depreciation – Cash Register is P500.
c. Carrying Value of the Cash Register as at December 31, 2017, is P4,900
Carrying Value = Cost less Accumulated Depreciation
= P5,400 – P500
= P4,900
1.1.1 Record the adjusting entry for depreciation of the cash register for the year ended December 31, 2018.
Adjusting entry:

a. For the year ended December 31, 2018, the Depreciation Expense – Cash Register is still P500.
b. As at the year ended December 31, 2018, Accumulated Depreciation – Cash Register is P1,000.
c. Carrying Value of the Cash Register as at December 31, 2018 is P5,400
Carrying Value = Cost less Accumulated Depreciation
= P5,400 – P1,000
= P4,400
Notes:
 Depreciation Expense is an expense, hence, a nominal or temporary account. It is not carried forward to
the succeeding year.
 Accumulated Depreciation is a contra-asset account and is carried forward to the succeeding year. Since
it is a contra-asset account, it decreases the value of the Cash Register as reflected in the Carrying Value.
1.2. Compute for the depreciation expense using Straight Line Method, for the fiscal year ended September 30,
2017
= (P5,400 – P400) / 10 years
= P500 (Annual Depreciation)
= P500 x 9 months* / 12 months
= P375
Adjusting entry:
*From January 1 (date of purchase) to September 30
a. For the fiscal year ended September 30, 2017, the Depreciation Expense – Cash Register is P375.
b. As at the year ended September 30, 2017, Accumulated Depreciation – Cash Register is P375.
c. Carrying Value of the Cash Register as at September 30, 2017 is P5,025
Carrying Value = P5,400 – P375
= P5,025
1.2.1 Compute for the Depreciation expense using Straight Line Method, for the fiscal year ended September
30, 2018.
= (P5,400 – P400) / 10 years
= P500
Note: The cash register was used from October 1, 2017 up to September 30, 2018, hence, one year.
Adjusting entry:
a. For the fiscal year ended September 30, 2018, the Depreciation Expense – Cash Register is P500.
b. As at the year ended September 30, 2018, Accumulated Depreciation – Cash Register is P875
st nd
(1 year=P375; 2 year=P500).
c. Carrying Value of the Cash Register as at September 30, 2018, is P4,525
Carrying Value = P5,400 – P875
= P4,525
1.3 Compute for the depreciation expense, using Double Declining Balance Method, for the year ended
December 31, 2017.
Depreciation Expense = 2 [(Cost – Salvage Value) / Useful Life]
= 2 [(P5,400 – P400) / 10 years]
= P 1,000
Adjusting entry:
12.31. 2017 Depreciation Expense- Cash Register P1,000
Accum. Depreciation- Cash Register P1,000
2. Worlds of Fun purchased a machine for P190,000. The machine has a useful life of 8 years and a residual
value of P10,000. Worlds of Fun estimates that the machine could produce 750,000 units of product over its
useful life. In the first year, 95,000 units were produced. In the second year, production increased to 111,000
units.
Calculate the depreciation expense under the scenarios in the succeeding slides:
2.1. Using the units-of-production method, what is the amount of depreciation that should be recorded for the
first year?
Depreciation Expense = (Number of Units Produced / Life in Number of Units) x (Cost - Salvage Cost)
(First Year) = (95,000 / 750,000) x (P190,000- P10,000) = P22,800
Adjusting entry:
EOY Depreciation Expense- Machinery P22,800
Accum. Depreciation- Machinery P22,800
a. For the first year, the Depreciation Expense – Machinery is P22,800.

b. As at end of the first year, Accumulated Depreciation – Machinery is P22,800.
c. Carrying Value of the Machinery at the end of the first year is P167,200.
Carrying Value = P190,000 – P22,800
= P167,200
2.1.1 Using the units-of-production method, what is the amount of depreciation that should be recorded for the
second year?
Depreciation Expense (Second Year) = (111,000 / 750,000) x (P190,000- P10,000) = P26,640
Adjusting entry:
a. For the second year, the Depreciation Expense – Machinery is P26,640.

b. As at end of the second year, Accumulated Depreciation – Machinery is P49,440
st nd
(1 year=P22,800; 2 year= P26,640).
c. Carrying Value of the Machinery at the end of the second year is P140,560.
= P140,560
2.3. If Worlds of Fun used the SYD, what is the amount of depreciation that should be recorded for the first
year?
Compute for the Sum of Years first using the useful life of the machinery which is 8 years.
Sum of Years = 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 36
Depreciation Table should look like this
Year Depreciation Fraction
1 8/36
2 7/36
3 6/36
4 5/36
5 4/36
6 3/36
7 2/36
8 1/36
st
2.3 Depreciation Expense (1 Year) = ( 8 / 36) x (P190,000 – P10,000) = P 40,000
Adjusting entry:
a. For the first year, the Depreciation Expense – Machinery is P40,000.

b. As at end of the first year, Accumulated Depreciation – Machinery is P40,000.
d. Carrying Value of the Machinery at the end of the second year is P150,000.
= P150,000
2.3.1 Using the SYD, what is the amount of depreciation that should be recorded for the second year?
Depreciation Expense (2nd Year)= ( 7 / 36) x (P190,000 – P10,000) = P 35,000
Adjusting entry:
a. For the second year, the Depreciation Expense – Machinery is P35,000.

b. As at end of the second year, Accumulated Depreciation – Machinery is P75,000
st nd
(1 year= P40,000; 2 year= P35,000).
c. Carrying Value of the Machinery at the end of the second year is P115,000.
= P115,000
Practice Problems:
1. On March 1, 2018, Ligo Fish Da Co. purchased equipment costing P100,000. The equipment has a residual value of
P10,000, and an estimated useful life of 5 years or 36,000 shoes. Actual units produced during the calendar year,
December 31, 2018, were 7,000 units.
Calculate the following:

a. Depreciation Expense using straight line method for the year ended
b. Carrying Value as at the year ended
c. Adjusting entry to record the depreciation
In relation to the information provided for Ligo Fish Da Co., calculate for the following:
a. Depreciation Expense using straight line method for the year ended December 31, 2019
b. Accumulated Depreciation as at the year ended December 31, 2019
c. Carrying Value as at the year ended
d. Adjusting entry to record the depreciation for the year
1.1 On March 1, 2018, Ligo Fish Da Co. purchased equipment costing P100,000. The equipment has a residual value of
P10,000, and an estimated useful life of 5 years or 36,000 shoes. Actual units produced during the fiscal year, June 30,
2018, were 7,000 units.

a. Depreciation Expense using straight line method for the year ended
In relation to the preceding slide, calculate for the following:

a. Depreciation Expense using straight line method for the year ended June 30, 2019
b. Accumulated Depreciation as at the year ended June 30, 2019
1.2 On January 1, 2018, Ligo Fish Da Co. purchased equipment costing P100,000. The equipment has a residual value of
P10,000, and an estimated useful life of 5 years or 36,000 shoes. Actual units produced during the year ended, December
31, 2018, were 7,000 units.

a. Depreciation Expense using unit of production method for the year ended
1.3 On January 1, 2018, Ligo Fish Da Co. purchased equipment costing P100,000. The equipment has a residual value of
P10,000, and an estimated useful life of 5 years or 36,000 shoes. Actual units produced during the year ended, December
31, 2018, were 7,000 units.

a. Depreciation Expense using sum of years digit for the year ended
In relation to the preceding slide, calculate for the following:

a. Depreciation Expense using sum of years digit for the year ended December 31, 2019
b. Accumulated Depreciation as at the year ended December 31, 2019
ANSWERS:
1. Calculate the following:
a. Depreciation Expense for the year ended December 31, 2018 is P15,000.
Depreciation Expense = (P100,000 – P10,0000) / 5 years
= P18,000 (annual depreciation)
= P18,000 x (10 months / 12 months)
= P15,000
b. Carrying Value as at the year ended is P85,000
12.31.2018 Depreciation Expense- Equipment P15,000
Accum. Depreciation – Equipment P15,000
Part 2
a. Depreciation Expense the year ended December 31, 2019 is P18,000.
(The equipment was used for the whole year of 2019.)
b. Accumulated Depreciation as at the year ended December 31, 2019 is P33,000 (P15,000 + P18,000).
c. Carrying Value as at the year ended is P67,000.
1.1 Fiscal year ended, June 30, 2018
a. Depreciation Expense for the year ended June 30, 2018 is P6,000.
Annual Depreciation = P18,000
Depreciation Expense = P18,000 x (4 months* / 12 months)
= P6,000
b. Carrying Value as at June 30, 2018 is P94,000.
*March 1, 2018 to June 30, 2018
1.1 Fiscal year ended, June 30, 2019 (Part 2)

a. Depreciation Expense for the year ended June 30, 2019 is P18,000. The equipment was used from July 1, 2018 up
to end of the fiscal year.
b. Accumulated Depreciation as at the year ended June 30, 2019 is P24,000.
c. Carrying Value as at the year ended is P76,000.
Accum. Depreciation- Equipment P18,000
1.2 Unit of Production

a. Depreciation Expense method for the year ended, December 31, 2018 is P17,500.
Depreciation Expense = (Unit Produced / Total Production) x Depreciable Amount
Depreciation Expense =( 7,000 units / 36,000 units ) x (P100,000 – P10,000)
Depreciation Expense = P17,500
b. Carrying Value as at the December 31, 2018 is P82,500.
c. Adjusting Entry
Accum. Depreciation- Equipment P17,500
Adjusting Entries- Accruals
Accounting Cycle: Adjusting Entries

Accruals- transaction is already incurred or earned but not yet paid or collected
Period-end adjustments:
Accrued Income- - income is already earned but not yet collected.
Receivables XXX
Income XXX
Accrued Expense- expense is already incurred but not yet paid.
Expense XXX
Payable XXX
Provide the journal entry and adjusting entry :
1. Atty. Eztinozo received P90,000 promissory note with interest of 10% on April 1, 2018 from Ms.
Everything for service rendered by the former. The note has a term of 1 year.
Atty. Eztinozo follows calendar year end reporting while Ms. Everything has a fiscal year end of
June 30.
Journal entries:
Book of Atty. Eztinozo:
April 1, 2018 Note Receivable P90,000

Service Income P90,000
To record the promissory note received in exchange of service
Book of Ms. Everything:

April 1, 2018 Legal Expenses P90,000
Note Payable P90,000
To record the promissory note issued
Adjusting entries:
Book of Atty. Eztinozo:
December 31, 2018, Interest Receivable P6,750

Interest Income P6,750
To record the accrual of interest from the note
Interest = Principal x rate x time
= P90,000 x 10% x 9 months */ 12 months
* Accrual period was from April 1, 2018 to December 31, 2018 (calendar year-end)
Book of Ms. Everything:
June 30, 2018 Interest Expense P2,250

Interest Payable P2,250
To record the accrual of interest from the note
= P90,000 x 10% x 3 months */ 12 months
* Accrual period was from April 1, 2018 to June 30, 2018 (fiscal year-end)
2. Mr. A issued P500,000 promissory note with interest of 12% on June 1, 2018 to Ms. B for cash
borrowed. The note has a term of 90 days. Mr. A uses the calendar year end for its reporting
while Ms. B has a fiscal year end of June 30.
Journal entries:
Book of Mr. A:
June 1, 2018 Cash P500,000

Note Payable P500,000
To record the promissory note issued in exchange of cash
Book of Ms. B:
June 1, 2018 Note Receivable P500,000
Cash P500,000
To record the promissory note received
Adjusting entries:
Book of Mr. A:
No Adjusting Entry
The note only has a term of 90 days or three months, hence it is due for payment on August 30, 2018. No
adjustment has to be recorded since no accrual shall occur as at year end of December 31, 2018.
Adjusting entries:
Book of Ms. B:
June 30, 2018 Interest Receivable P5,000

Interest Income P5,000
To record the accrual of interest income from the note
= P500,000 x 12% x 1 month*/ 12 months**
* Accrual period was from June 1, 2018 to June 30, 2018 (fiscal year-end)
** Regardless of the term of the promissory note, it is assumed the annual rate is used.
3. ABC Co. pays its employees every Friday of the week. Total weekly salaries cost P500,000 for
all employees. For calendar year end of 2019, the last day fell on a Tuesday.
Journal entry:
Book of ABC Co.
No journal entry is required since no initial transaction occurred.
Adjusting entry
Book of ABC Co.

December 31, 2019 Salaries Expense P200,000
Salaries Payable P200,000
Computation:
P500,000 is for a 5-day work week with pay out every Friday.
P500,000/ 5 days x 2 days* = P200,000
*Only 2 days are covered for the calendar year-end, December 30 and December 31
4. DEF Co. failed to accrue rent income of P25,000, to be collected 2 days after fiscal year end of
March 31, 2018.
Journal entry:
Book of DEF Co.
No journal entry is required since no initial transaction occurred.
Adjusting entry
Book of DEF Co.
March 31, 2019 Rent Receivable P25,000
Rent Income P25,000
Practice Problems
Provide the adjusting entry for the following:
1. On September 30, 2018, Bert Motor Service Center issued a 90-day, 18% note for P10,000 cash loan.
The service center uses the calendar year end.
2. Commission income of P5,000 was not recorded at year end.
3. Sole Proprietor forgot to record Utility expense of P10,000 at year end.
4. Clients were billed for professional services on year-end, P16,400.
5. Interest of 12% per annum on P65,000, 1-year loan received on December 1, 2018, has accrued.
(Calendar year end)

1. Interest Expense P 450
Interest Payable P 450
2. Commission Receivable P5,000
Commission Income P5,000
3. Utility expense P10,000
Utility Payable P10,000
4. Accounts Receivable P16,400
Service Income P16,400
5. Interest Expense P650
Interest Payable P650

1. On June 30, 2018, the company’s fiscal year end, TikitiTok Company calculated P60,000 worth of rent
earned but not yet collected.
2. On March 1, 2019, ExtraPower Company borrowed P200,000 cash from ExtraLender Company. The

former issued a promissory note with rate of 5% and term of 3 months. ExtraPower Company has year
end of April 30 while ExtraLender Company has calendar year end. Provide the adjusting entries for
both companies.
3. Mocha Ethel, a sole proprietor, failed to record utilities expense amounting to P19,000 at year end.
4. Isko V. Co, sole proprietor, pays out employee salaries every Saturday of each week amounting to
P90,000. His business has a year end of July 31, 2019, Wednesday.
Adjusting Entries - Deferrals
Deferrals are adjustments that occur when cash is received before revenue is earned or when cash is paid
before expense is incurred.
Deferred Revenue- Income already collected but not yet earned.

Deferred Expense- Expense already paid but not yet incurred.
Deferred Income
Already Earned?
Yes - Income / Revenue
No - Liability (Unearned Income)
Two Approaches
a. Income Method
Initial Entry: Cash XXX
Income XXX

Adjusting entry: Income XXX
Unearned Income XXX
To recognize portion of the income not yet earned as at year end.
 Income method uses an income account in recognition of collection of cash.

 Cash is reported as receipt in the Balance Sheet while the income account will be part of the Income
Statement.
b. Liability Method

Initial Entry: Cash XXX
Unearned Income XXX
Adjusting Entry: Unearned Income XXX

Income XXX

To recognize portion of the liability which has already been earned.
 Liability involves the use of a liability account in recording receipt of cash.

 Both Cash and Unearned Income are reported in the Balance Sheet.
Deferred Expense
Already Incurred?
Yes - Expense
No - Asset (Prepaid Expense)
Two Approaches
a. Expense Method
Initial Entry: Expense XXX
Cash XXX
Adjusting Entry: Prepaid Expense XXX

Expense XXX

To recognize portion of expense not yet incurred.
 The expense method uses an expense account in recognition of cash payment.

 Cash is payment will affect cash balance reported in the Balance Sheet while expense account will be
reported under Income Statement.
b. Asset Method
Initial Entry: Prepaid Expense XXX
Cash XXX
Adjusting Entry: Expense XXX

Prepaid Expense XXX

To recognize portion of advance expense already incurred.
 The asset method uses an asset account (Prepaid Expense) in recognition of advance cash payment.
 Prepaid expense is reported in the Balance Sheet under assets.
Sample Problem- Deferred Income
1. On June 1, 2012, Mr. Vinegar paid P60,000 annual rent to Ms. Toyo. The rent commences on the
same day. Mr. Vinegar uses the asset method in recording while Ms. Toyo uses the liability method.
Both uses the calendar method in reporting.
Book of Ms. Toyo

Initial Entry:
06.01.2012 Cash P60,000
Unearned Rent Income P60,000
Adjusting Entry:
12.31.2012 Unearned Rent Income P35,000
Rent Income P35,000
 As at year end, Ms. Toyo has already leased her property to Mr. Vinegar for 7 months (June 1-Dec 31).
P60,000 / 12 months = P5,000 x 7 months = P35,000
 The adj. entry reduced the value of the unearned rent income and increased the value of the rent income.
same day. Mr. Vinegar uses the asset method in recording while Ms. Toyo uses the income method.
Book of Ms. Toyo

Initial Entry:
06.01.2012 Cash P60,000
Rent Income P60,000\
Adjusting Entry:
12.31.2012 Rent Income P25,000
Unearned Rent Income P25,000
 As at year end, Ms. Toyo has only leased her property to Mr. Vinegar for 7 months (June 1-Dec 31).
Which means that a liability will be recognized since P60,000 is not completely earned. P25,000 is still
unearned.
 The adjusting entry reduced the value of the rent income and increased the value of the unearned rent
income.
3. On May 31, 2016, Mr. Oslo paid P300,000 six months worth of insurance to Ms. Lisbon.
The insurance period covers June 1 up to December 31. Mr. Oslo uses the expense method
in recording while Ms. Lisbon uses the income method. Both uses the fiscal year end June 30, 2016.
Book of Ms. Lisbon

Initial Entry:
05.31.2016 Cash P300,000
Insurance Income P300,000
Adjusting Entry:
06.30.2016 Insurance Income P250,000
Unearned Insurance Income P250,000
 As at year end, Ms. Lisbon has only earned one month from the amount collected (June 1- June 30),
hence, an adjustment to recognize the unearned portion for five months will be recorded.
P300,000 / 6 months = P50,000 x 5 months= P250,000
* The adjusting entry reduced the value of the unearned rent income and increased the value of the rent income.
The insurance period covers June 1 up to December 31. Mr. Oslo uses the expense method in
recording while Ms. Lisbon uses the liability method. Both uses the fiscal year end June 30, 2016.
Book of Ms. Lisbon

Initial Entry:
05.31.2016 Cash P300,000
Unearned Insurance Income P300,000
Adjusting Entry:
06.30.2016 Unearned Insurance Income P50,000
Insurance Income P50,000
 As at year end, Ms. Lisbon has only earned one month from the amount collected (June 1- June 30).
The adjustment to reflect to portion earned needs to be recorded.
P300,000 / 6 months = P50,000 x 1 month = P50,000
* The adjusting entry reduced the value of the unearned insurance income and increased the value of
the insurance income.
Sample Problem- Deferred Expense
same day. Mr. Vinegar uses the asset method in recording while Ms. Toyo uses the liability method.
Book of Mr. Vinegar

Initial Entry:
06.01.2012 Prepaid Rent Expense P60,000
Cash P60,000
Adjusting Entry:
12.31.2012 Rent Expense P35,000
Prepaid Rent Expense P35,000
 Seven months worth of rent has already been incurred, hence, such portion represent expense amounting
to P35,000.
(P60,000 / 12 months = P5,000 x 7 months passed = P35,000)
 The adjusting entry reduced the value of the prepaid rent expense to reflect the true value of the actual
expense incurred for 7 months and advance payment for the remaining 5 months.
same day. Mr. Vinegar uses the expense method in recording while Ms. Toyo uses the income
method. Both uses the calendar method in reporting.
Book of Mr. Vinegar

Initial Entry:
06.01.2012 Rent Expense P60,000
Cash P60,000
Adjusting Entry:
12.31.2012 Prepaid Rent Expense P25,000
Rent Expense P25,000
 Five months worth of rent has not yet been incurred, hence, such portion represent prepaid rent expense
amounting to P25,000.
(P60,000 / 12 months = P5,000 x 5 months remaining = P25,000)
 Expense payment was adjusted from P60,000 to P35,000 which represents the number of expired
months.
The insurance period covers June 1 up to December 31. Mr. Oslo uses the expense
method in recording while Ms. Lisbon uses the income method. Both uses the fiscal year end June
30, 2016.
Book of Mr. Oslo

Initial Entry:
05.31.2016 Insurance Expense P300,000
Cash P300,000
Adjusting Entry:
06.30.2016 Prepaid Insurance Expense P250,000
Insurance Expense P250,000
 As at year end, Mr. Olso has incurred one-month worth of rent from the amount paid (June 1- June 30).
P300,000 / 6 months = P50,000 x 1 month= P50,000
* The adjusting entry reduced the value of the Insurance Expense and increased the value of the
Prepaid Insurance Expense.
The insurance period covers June 1 up to December 31. Mr. Oslo uses the asset method in recording
while Ms. Lisbon uses the liability method. Both uses the fiscal year end June 30, 2016.
Book of Mr. Oslo

Initial Entry:
05.31.2016 Prepaid Insurance Expense P300,000
Cash P300,000
Adjusting Entry:
06.30.2016 Insurance Expense P50,000
Prepaid Insurance Expense P50,000
 As at year end, Mr. Oslo only incurred one month from the amount paid (June 1- June 30).
P300,000 / 6 months = P50,000
* The adjusting entry reduced the value of the prepaid insurance expense and increased the value of
the insurance expense.
Adjusting Entries- Bad Debts
Bad Debts- A bad debt expense is recognized when a receivable is no longer collectible because a customer is
unable to fulfill their obligation to pay an outstanding debt due to bankruptcy or other financial problems.
In order to comply with the matching principle, bad debt expense must be estimated using the allowance
method in the same period in which the sale occurs.
Direct Write-Off vs. Allowance Method

a. Direct Write- off Method- uncollectible accounts are written off directly to expense as they become
uncollectible. This is typically used for tax purposes.
b. Allowance Method- provides an estimated amount of uncollectible accounts in the same period in which

the revenue is earned.
Bad Debts Expense

Bad Debts Expense XXX
Allowance for Bad Debt Expense XXX
 Bad Debt Expense is an expense account to be presented in the Income Statement.
 Allowance for Bad Debt Expense is a contra-asset* account to be presented in the Balance Sheet.
Allowance for Bad Debt decreases the value of Accounts Receivable.
Note:
Doubtful Accounts Expense XXX
Allowance for Doubtful Accounts XXX
“Doubtful Accounts Expense” can be used in place of “Bad Debt Expense” while “Allowance for Doubtful
Accounts” is same with “Allowance for Bad Debts”.
Recording using the Allowance Method

1. Percentage of Sales Method
2. Percentage of Accounts Receivable
3. Aging of Accounts Receivable
Net Realizable Value

This pertains to the cash realizable value of the accounts receivable.
Formula:
Net Realizable Value (NRV) = Accounts Receivable - Allowance for Doubtful Accounts
Percentage of Sales
This is the simplest method where adjustment is based on the total credit sales and ignoring any existing balance
in the allowance for bad debt account.
Formula:
Bad Debt Expense = Sales x Percentage of doubtful account
Percentage of Revenue
Sample Problem:
ABC Company has a total of P500,000 credit revenue for the year ended December 31, 2015 while P800,000
credit sales were earned for 2016. ABC Company reported P110,000 and P150,000 of accounts receivables for
the years ended 2015 and 2016, respectively.
Its policy for recognition of bad debts is 10% for both years.
The company uses Percentage of Sales method.
Percentage of Sales
2015
Computation:
Bad debts expense = total sales x percentage of bad debts
= P500,000 x 10%
= P50,000
Adjusting Entry:
12.31.2015 Doubtful Accounts Expense P50,000
Allowance for Doubtful Accounts P50,000
1. For the year ended December 31, 2015, the bad debt expense is P50,000, which will be reported in the
Income Statement, as part of Expenses.
2. For the year ended December 31, 2015, the allowance for bad debts is P50,000 to be reported in the
Balance Sheet.
3. Net Realizable Value as at 2015 is P60,000
NRV = A/R – Allowance for Bad Debts
NRV = P110,000 – P50,000
NRV = P60,000
2016
Computation:
Bad debts expense = total sales x percentage of bad debts
= P800,000 x 10%
= P80,000
Adjusting Entry:
12.31.2016 Doubtful Accounts Expense P80,000
Allowance for Doubtful Accounts P80,000
1. For the year ended December 31, 2016, the bad debt expense is P80,000, which will be reported in the
Income Statement, as part of Expenses.
Balance Sheet. (P50,000 + P80,000)
NRV = P150,000 – P130,000
NRV = P20,000
Percentage of Accounts Receivable
Sample Problem:
DEF Company has a total of P900,000 credit revenue for the year ended December 31, 2015 while P1,350,000
credit sales were earned for 2016. DEF Company reported P110,000 and P150,000 of accounts receivables for
the years ended 2015 and 2016, respectively.
Its policy for recognition of bad debts is 8% for both years.
The company uses Percentage of AR method.
For us to record the adjusting entries, we need to compute first the required allowance.
2015
Computation:
Required Allowance= Accounts Receivable x Percentage of bad debts
= P110,000 x 8%
= P8,800
Adjusting Entry:
12.31.2015 Bad Debts Expense P8,800
Allowance for Bad Debts P8,800
1. For the year ended December 31, 2015, the bad debt expense is P8,800.
Balance Sheet.
NRV = P110,000 – P8,800
NRV = P101,200
2016
8,800 12.31.2015
Computation:
Required Allowance= accounts receivable x percentage of bad debts 3,200 12.31.2016
= P150,000 x 8%
= P12,000
Adjusting Entry:
12.31.2016 Bad Debts Expense P3,200
Allowance for Bad Debts P3,200

P12,000 – P8,800 = P3,200
1. For the year ended December 31, 2016, the bad debt expense is P3,200.
Balance Sheet.
NRV = P150,000 – P12,000
NRV = P138,000
Sample Problems- Percentage of Sales
1. Specter Ross Partnership had the following information for 2015 and 2016:
2015 2016
Accounts Receivable P 2,000,000 P 3,500,000
Credit Sales 1,000,000 2,250,000
Percentage 10% on Sales
Requirements:
a. Provide the adjusting entries for doubtful accounts for both periods.
b. Provide the NRV for both periods.
a. Specter Ross Partnership (2015):

Adjusting Entries:
Bad Debts Expense 100,000
Allowance for Bad Debts 100,000
(P1,000,000 x 10% = P100,000)
b. Net Realizable Value

NRV = P2,000,000 – P100,000
NRV = P1,900,000

Adjusting Entries:
(P2,250,000 x 10% = P225,000)

NRV = P3,500,000 – P325,000*
NRV = P3,175,000
*(P100,000 + P225,000) = P325,000
Sample Problems- Percentage of A/R
2. Specter Ross Partnership had the following information for 2015 and 2016:
2015 2016
Accounts Receivable P 2,000,000 P 3,500,000
Credit Sales 1,000,000 2,250,000
Percentage 8% on Accounts Receivable
Requirements:

Adjusting Entries:
(P2,000,000 x 8% = P160,000) Required Balance

NRV = P2,000,000 – P160,000
NRV = P1,840,000


Adjusting Entries:

NRV = P3,500,000 – P280,000
NRV = P3,220,000
Sample Problems- Percentage of Sales
3. Mike Harvey Partnership had the following information for 2015 and 2016:
2015 2016
Accounts Receivable P 800,000 P 650,000
Sales 2,000,000 1,700,000
Percentage 9% on Sales
Notes: Only 80% of the total sales were on account and still uncollected.
Requirements:
a. Mike Harvey Partnership (2015):

Adjusting Entries:
Doubtful Accounts Expense 144,000
Allowance for Doubtful Accounts 144,000
Credit Sales P2,000,000 x 80% = P1,600,000
Doubtful Accounts P1,600,000 x 9% = P144,000

NRV = P800,000 – P144,000
NRV = P656,000

Adjusting Entries:
Doubtful Accounts Expense 122,400
Allowance for Doubtful Accounts 122,400
Credit Sales P1,700,000 x 80% = P1,360,000
Doubtful Accounts P1,360,000 x 9% = P122,400

NRV = P650,000 – P266,400*
NRV = P656,000
* P144,000 + P122,400 = P266,400

Sample Problems- Percentage of A/R
4. Mike Harvey Partnership had the following information for 2015 and 2016:
2015 2016
Accounts Receivable P 800,000 P 1,250,000
Sales 2,000,000 1,700,000
Percentage 10% on Accounts Receivable
Requirements:

Adjusting Entries:
(P800,000 x 10% = P80,000) Required Balance

NRV = P800,000 – P80,000
NRV = P720,000

Adjusting Entries:

NRV = P1,250,000 – P125,000
NRV = P1,125,000

Adjusting Entries (Accounting)

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Adjusting Entries- Depreciation

Adjusting journal entry:

Carrying Value or Book Value represents the remaining value of the

12.31.2018 Depreciation Expense- Cash Register P500

a. For the first year, the Depreciation Expense – Machinery is P22,800.

a. For the second year, the Depreciation Expense – Machinery is P26,640.

Depreciation Table should look like this

a. For the first year, the Depreciation Expense – Machinery is P40,000.

a. For the second year, the Depreciation Expense – Machinery is P35,000.

Calculate the following:

Calculate the following:

In relation to the preceding slide, calculate for the following:

Calculate the following:

Calculate the following:

In relation to the preceding slide, calculate for the following:

*March 1, 2018 to June 30, 2018

1.1 Fiscal year ended, June 30, 2019 (Part 2)

1.2 Unit of Production

Adjusting Entries- Accruals

Accounting Cycle: Adjusting Entries

April 1, 2018 Note Receivable P90,000

Book of Ms. Everything:

December 31, 2018, Interest Receivable P6,750

Book of Ms. Everything:

June 30, 2018 Interest Expense P2,250

June 1, 2018 Cash P500,000

June 30, 2018 Interest Receivable P5,000

Provide the journal entry and adjusting entry :

Book of ABC Co.

Provide the journal entry and adjusting entry :

Provide the adjusting entry for the following:

Provide the adjusting entry for the following:

2. On March 1, 2019, ExtraPower Company borrowed P200,000 cash from ExtraLender Company. The

Deferred Revenue- Income already collected but not yet earned.

To recognize portion of the income not yet earned as at year end.

 Income method uses an income account in recognition of collection of cash.

b. Liability Method

Adjusting Entry: Unearned Income XXX

 Liability involves the use of a liability account in recording receipt of cash.

Adjusting Entry: Prepaid Expense XXX

 The expense method uses an expense account in recognition of cash payment.

Adjusting Entry: Expense XXX

Sample Problem- Deferred Income

Book of Ms. Toyo

Book of Ms. Toyo

Book of Ms. Lisbon

Book of Ms. Lisbon

Sample Problem- Deferred Expense

Book of Mr. Vinegar

Book of Mr. Vinegar

Book of Mr. Oslo

Book of Mr. Oslo

Adjusting Entries- Bad Debts

Direct Write-Off vs. Allowance Method

b. Allowance Method- provides an estimated amount of uncollectible accounts in the same period in which

Bad Debts Expense

Recording using the Allowance Method

Net Realizable Value

Percentage of Accounts Receivable