Quarter 4, Week 1

Learning Activity Sheets 7 (LAS_7, Qtr. 4)

for FABM 1 Grade 11

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT 1

ACTIVITY SHEET 7

The Adjusting Entries Process

I. Learning Competency with Code

• Identify business and nonbusiness transactions, enumerate the types of
business documents, recite the rules of debit and credit, and apply these in
simple cases.
• Prepare adjusting entries. (ABM_FABM11- IVa-d -33)

II. Activity Proper

At the end of the accounting period, when the journalizing and the posting
processes have been completed and the trial balance has been prepared, accounts are
examined to determine whether their balances reflect their true values or not.

Some accounts in the general ledger would require updating. The journal entries
that bring the accounts up to date are called adjusting entries. One purpose of
adjusting entries is for income and expenses to be reported in the correct period.

Generally, majority of the account balances may already be presented in the

financial statements. However, there are accounts that need to be updated or
corrected. The accounts must be adjusted to determine the correct amount at which
they may be presented in the financial statements of the business enterprise.

Activity 1: Adjustment process

Entries made at the end of the accounting period to update or correct the
accounts in order to portray realistic financial statements are called adjusting
entries. They have at least one statement of financial position account entry and at
least one income statement account entry. They are needed when deferrals and
accruals exist.

A deferral is the postponement of the recognition of an expense already paid or

of a revenue already received. Deferrals would be needed in the following cases:

1. There are costs recorded that must be apportioned between two or more
accounting periods. Examples are cost of the building, prepaid insurance, and
supplies.
2. There are revenues recorded that must be apportioned between two or more
accounting periods. Example, commissions collected in advance for services to
be rendered in later periods.

Page 1 of 11
 An accrual is the recognition of an expense that has been incurred but not yet
paid or revenue that has been earned but not yet collected. Accrual would be required
in the following cases:

1. There are unrecorded revenues. An example is commissions earned but not

yet collected or billed to customers.
2. There are unrecorded expenses. An example is the wages earned by the
employees in the current accounting period but after the last pay period.

Recorded Costs Between Two or more Accounting Periods (Deferral)

Prepaid Expenses are expenses paid in advance. Not yet incurred but already
paid. Among the items are rent, insurance, and supplies. At the end of the accounting
period, a portion of these goods/services most likely have been used or will have
expired. The part of the expenditure that has benefitted current operations is treated
as an expense of the period. On the other hand, the part not consumed or expired is
treated as an asset that applies to the future operation of the business. If the
adjusting entries for prepaid expenses are not made at the end of the month, both the
statement of financial position and income statement will be stated wrong. The asset
of the business will be overstated and the expenses will be understated. For this
reason, owner’s equity on the statement of financial position and profit on the income
statement will be overstated.

There are two methods of recording prepaid expenses: (a) Asset Method, and (b)
Expense Method. Under the asset method, an asset account is debited for the advance
payment of expenses. Under the expense method, an expense account is used.

The adjusting entry for both methods also differs. Under the asset method, the
amount of the journal entry is expired or used portion of the amount initially paid.
Under the expense method, the amount of the adjusting journal entry is the unexpired
or unused portion of the amount initially paid.

Illustration 7.1 Adjusting Entries to record Deferred Expenses or Prepaid

Expenses

March 2, 2020 - TGH Company paid P48,000 for a one-year rent.

Transaction: Expiration of 10 months rent.

Analysis: Prepaid Rent, an asset account is decreased. Rent Expense, an expense

account, is increased.

Rule: Debit to increase an expense (normal balance is Debit), credit to decrease an

asset.

Page 2 of 11
Journal Entry:

Asset Method
Date Description PR Debit Credit
2020
March 2 Prepaid Rent 48,000
Cash 48,000
To record payment of rent for one year.

Dec 31 Rent Expense 40,000

Prepaid Rent 40,000
To record rent expense incurred for the
month.
P48,000 x (10mos. / 12 mos.) = P40,000

Expense Method
Date Description PR Debit Credit
2020
March 2 Rent Expense 48,000
Cash 48,000
To record payment of rent for one year.

Dec 31 Prepaid Rent 8,000

Rent Expense 8,000
To record rent expense incurred for the
month.
[P48,000–{P48,000x(10mos./12mos.)=P40,000}] = P8,000

Posting to Ledger:

General Ledger
Account: Prepaid Rent Account No. 1003
Date Item PR Debit Credit Balance
March 2 Advance Payment 48,000 48,000
March 31 Adjusting Entries 40,000 8,000

General Ledger
Account: Rent Expense Account No. 5003
Date Item PR Debit Credit Balance
March 2 Advance Payment 48,000 48,000
March 31 Adjusting Entries 8,000 40,000

The Prepaid Rent account now has a balance of P8,000 which represents 2-
month paid in advance. The Rent Expense account reflects the P40,000 expense of
the month.

Page 3 of 11
Illustration 7.2 Adjusting Entries to record Deferred Expenses or Prepaid
Expenses

On February 21, 2021 Huwan purchased P10,000 of office supplies on account.

By the end of the month, P3,000 worth of these supplies are still unused.

Under the asset method, a supplies account (an asset) is recorded when the
amount is paid.

The February 21, 2021 entry to record the purchase on the account of office
supplies was already posted to the general ledger and included in the balances, as
shown in the unadjusted trial balance. (the entry is shown for illustration purposes)

Asset Method

General Journal
Date Account Title & Explanation PR Debit Credit
2021
Feb 19 Supplies P10,000
Initial
Entry Accounts Payable P10,000
made To record the purchased of office
supplies on account (asset method).

Feb 28 Supplies Expense P7,000

Adjusting
Entry
Supplies P7,000
To set-up the value of unused
supplies.

The “Supplies” account debited on February 28, 2021 (end of the month) above is
an asset account and represents the value of supplies unused as of the end of
February 2021. If these entries will be posted to the general ledger, the following
should be the balance of each account:

Account Title Debit Credit

Supplies 3,000
Accounts Payable 10,000
Supplies Expense 7,000

Expense Method

General Journal
Date Account Title & Explanation PR Debit Credit
2021
Initial Entry
Feb 19 Supplies Expense P10,000
Accounts Payable P10,000
To record the purchased of office
supplies on account (expense method).

Page 4 of 11
Adjusting Entry
Feb 28 Supplies P3,000
Supplies Expense P3,000
To set-up the value of unused supplies.

If these entries are posted in the general ledger, the following should be the
balances of each account:

Account Title Debit Credit

Supplies 3,000
Accounts Payable 10,000
Supplies Expense 7,000

The asset account, Supplies, now reflects the proper amount of P3,000, yet to be
consumed. In addition, the amount of supplies used of the Supplies Expense during
the accounting period is reflected as P7,000.

Notice that even with the different approaches in recording the transactions in
the journal entries, the balances in the general ledger will always be the same whether
you used the asset method or the expense method.

Illustration 7.3 Adjusting Entries to record Deferred Income or Unearned

Revenue.

These are items that have been initially recorded as liabilities but are expected to
become income over time or through the operations of the business.

There are two methods of recording unearned revenue: (a) liability method, and
(b) revenue method . under the liability method, a liability account is used to record
the amount received in advance. Under the revenue method, a revenue account is
used.

For the adjusting journal entry, under the liability method, the amount of
adjusting entry is the end portion of the amount initially received. Under the revenue
method, the amount of the adjusting entry is the unearned portion of the amount
initially received.

To illustrate: March 1, 2021 – Huwan, the owner of the GoodFood Catering

Services, entered a contract with Accents Hotel for a year, starting 2021 to 2022. On
the same date, Accents Hotel paid an amount of catering service of P90,000 for 3
months. The entries to record and to adjust in the books are:
As of the end of March 2021, GoodFood Catering Services has already earned the
service revenue for the first month, thus an adjusting entry is recorded:

Liability Method

General Journal
Date Account Title & Explanation PR Debit Credit
2021
Initial Entry
March 1 Cash P90,000
Unearned Service Revenue P90,000
Page 5 of 11
 To record receipt of full payment for
the 3-month service contract with Accents
Hotel.

Adjusting Entry
March 31 Unearned Service Revenue P30,000
Service Revenue P30,000
To record service income earned for
1 month.
P90,000 x (1month/3months) = P30,000

Income Method

General Journal
Date Account Title & Explanation PR Debit Credit
2021
Initial Entry
March 1 Cash P90,000
Service Revenue P90,000
To record receipt of full payment for
the 3-month service contract with Accents
Hotel.

Adjusting Entry
March 31 Service Revenue P60,000
Unearned Service Revenue P60,000
To record service income earned for
1 month.
P90,000 – [P90,000 x (1mo./3mos.) = P30,000] = P60,000

Illustration 7.4 Depreciation of Plant and Equipment

When a company buys a long-lived asset such as building, equipment, automobile,

computer, and furnitures & fixtures, it is basically buying or prepaying for the
usefulness of that asset for as long as the asset provides a benefit to the business.
Proper accounting, therefore, requires the allocations of the cost of the asset over its
estimated useful life. The amount allocated to any one accounting period is called
depreciation or depreciation expense. Depreciation expense is an expense just like
any other cost incurred during an accounting period to obtain a revenue.

The depreciation must be estimated since it is often impossible to tell how long
an asset or how much asset is used in any one period.

Suppose GoodFood Catering Services estimates that the vehicle used for delivery
will last for 10 years (120 months) and will be worthless at the end of that time. The
depreciation of the vehicle is computed at P10,000 (P1,200,000/120 months). This
amount represents the cost allocated for the month, thus reducing the asset account
and increasing the expense account.

Page 6 of 11
 General Journal
Date Account Title & Explanation PR Debit Credit
2021
Initial Entry
Feb 2 Vehicle P1,200,000
Accounts Payable P1,200,000
To record Purchase of equipment on
account.

Adjusting Entry
Dec 31 Depreciation Expense - Vehicle P110,000
Accumulated Depreciation - Vehicle P110,000
To record depreciation of vehicle.
P1,200,000 x (11mos./120 mos.) = P110 ,000

In the above transaction, the asset account was not credited directly. Instead, a
new account, Accumulated Depreciation, was used. Accumulated Depreciation is a
contra-asset account used to accumulated the total past depreciations on a specific
long-lived asset. It is called contra account because it represents a balance that is
subtracted from the balance of an associated account. In this case, the balance of
Accumulated Depreciation-Vehicle, is a deduction from the associated account Vehicle.
After the adjustment entry has been made, the plant and equipment section of the
statement of financial position for the GoodFood Catering Services.

Plant and Equipment:

Vehicle P1,200,000
Less: Accumulated Depreciation (110,000)
P 1,090,000

The contra-account is used for two very good reasons. First, it recognized
that depreciation is an estimate. Second, the use of the contra account
preserves the fact of the original cost of the asset and shows how much of the
asset has been allocated to expense as well as the balance left to be
depreciated. As the months pass, the amount of the accumulated depreciation
will grow, and so the net amount shown as an asset will be reduced. In 24
months, for instance, Accumulated Depreciation – Vehicle, will have a total of
P240,000; when this amount is subtracted from Vehicle, the net amount of
P960,000 will remain, referred to as the net book value or carrying amount of
the asset.

Illustration 7.5 Unrecorded or Accrued Expenses (Accruals)

At the end of the accounting period, usually there are expenses that have
been incurred but not recorded in the account since payment has not been
made yet. These expenses require adjusting entries. One of the examples could
be the taxes, wages, and salaries. As the expense and the corresponding
liability accumulate, they are said to accrue – hence, the term accrued
expenses.

Page 7 of 11
 GoodFood Catering Services have regular employees and has a pay period
every 20th of the month and 10th of the following month. The employees have
earned their salaries for the first 20 days for the pay day every 20th, and the
remaining 10 days work for the next payday. The salaries for the 10th of the
following month is rightfully an expense for the month of March 2021, and the
liabilities should reflect the fact that the company does owe the employees for
those days. Because the daily wage of the employees is P350 a day, the expense
for 20 days is P7,000 (P350 x 20days).

To illustrate:
March 20, 2021 – Paid 3 employees for their salaries for the service
rendered for 20 days.

General Journal
Date Account Title & Explanation PR Debit Credit
2021
Initial Entry
March 20 Salaries Expense P21,000
Cash P21,000
To record salaries expense for March
1-20.
(P350 x 20days x 3 employees = P21,000)

Adjusting Entry
March 31 Salaries Expense P10,500
Salaries Payable P10,500
To record salaries expense for end
of March.
P350 x 10 days x 3 employees = P10 ,500

Provision for Doubtful Accounts

Most business extend credit to their customers or render service on

account. Despite careful screening of customers who will be granted this
privilege, there are still instances that accounts cannot be collected. These
uncollectible accounts are called doubtful accounts or recorded as bad debts
expense. Bad debts expense reduces the amount of account receivables but
instead of crediting Accounts Receivable, another account is used, Allowance
for Doubtful Accounts or Allowance for Bad Debts, a contra-asset account.
The difference between the Accounts Receivable account and the Allowance for
Bad Debts is known as net realizable value or carrying amount.
The following are the several method of estimating bad debts but only one
method will be discussed in this lesson.

Page 8 of 11
Illustration 7.6 Estimating Bad Debts Using a certain Percentage of Accounts
Receivable

1. Per general ledger, Accounts Receivable has a balance of P50,000. Based on

previous experience, 10% is estimated to be uncollectible. The adjusting entry would
be:

General Journal
Date Account Title & Explanation PR Debit Credit
2021
March 31 Bad Debts Expense P5,000
Allowance for Bad Debts P5,000
To record estimated uncollectible
accounts.
10% x P50,000 = P5,000

2. Using the same illustration, assume that per general ledger, Allowance for
Bad Debts has an existing credit balance of P3,000. In this case, the adjusting
entry would be:

Bad Debts Expense P2,000

Allowance for Bad Debts P2,000
To record estimated uncollectible accounts

Required balance (10% x P50,000) -------------- P5,000

Existing Balance ----------------------------------- 3,000
Amount of adjustment----------------------------- P2,000

As Presented in the Statement of Financial Position

Accounts Receivable P50,000

Less: Allowance for Bad Debts 5,000
Net Realizable Value P45,000

Prepared by: Noted by:

NECCA T. PALCAT-BERIN KRISTIN M. CEPEDA

Subject Teacher ABM Group Head

Approved by:

SALVADOR J. SEMBRAN, PhD

Asst. Principal II - SHS

Page 9 of 11
 Learning Activity Sheets 7 (LAS_7, Qtr. 4)
for FABM 1 Grade 11

Name of Learner: ________________________________ Date: _______________

Grade & Section: _________________________ Score: ____________________

ACTIVITY SHEET 7
The Adjusting Entries Process

III. Exercises

Written Task 7.1

A. True or False. Direction: Write True if the answer is correct, and False if
otherwise.
______________ 1. Adjusting entry is composed of at least one statement of financial
position account and at least one income statement account.
______________ 2. Adjusting journal entries are prepared at the beginning of the
accounting period.
______________ 3. Failure to prepare an adjusting entry to record accrued income will
result to have understated profit.
______________ 4. All adjusting entries are reversed at the beginning of the next
accounting period.
______________ 5. An accrual is the postponement of the recognition of an expense
already paid or of a revenue already received.

Written Task 7.2

B. Simple Recall. Direction: Write the correct answer on the space before each
number.
______________ 6. An entry that splits the nominal and the real accounts from a mixed
account.
______________ 7. An expense that is already paid but not yet incurred.
______________ 8. An income that is earned but not yet received or collected.
______________ 9. An income that is already received but not yet earned.
______________ 10. The allocation of the cost of the asset over its estimated useful life.

Performance Task 7.1

C. Problem. Direction: Write your answers on a separate sheet of paper.

OnStyle Services closes its books every December 31. Prepare appropriate adjusting
journal entries for the year ended December 31, 2020.

Page 10 of 11
1. OnStyle Services purchased land and building for P1,500,000. 60% of the cost
was allotted to land and the rest to the building. The building has a useful life
of 20 years and a salvage value of P100,000.
2. On May 1, the company entered into a contract with BVN Marketing Agency.
The company paid P180,000 for a 1-year advertising contract. (Asset Method
was used in recording the transaction.)
3. A one-year rent was paid in advance for the equipment used by the company in
the amount of P180,000. (Asset method was used in recording the transaction.)
4. Office supplies amounted to P11,000 for the year. At the end of the year, P3,500
amount of supplies remains on hand.
5. An equipment costing P150,000 has a salvage value of P30,000 and an
estimated useful life of 5years is depreciated on a straight-line basis.
6. Electric bill received on December 27 in the amount of P11,000 will be paid on
January 5,2021.
7. Employees salaries accrued but were unpaid at the end of the year, P36,000.
8. Uncollectible accounts at year-end is estimated to be 10% of Accounts
Receivable which has a balance of P85,000. Allowance for Bad Debts account
shows a credit balance of P3,500 before adjustment.

Page 11 of 11