ACCOUNTING was earned during the
accounting period covered.
Adjusting Entries
Debit: Interest Receivable
“ ADJUSTING THE BOOK” 5th step of
Accounting Cycle and is fairly crucial Credit: Interest Income
in the preparation of accurate or fairly
EXAMPLE
valued financial statements.
Charlotte received a ₱ 30, 000, 10%,
It is common practice for an 4-month note from a client on
entity November 15.
1. To recognize expense before
payment Simple Interest Formula
2. To recognize income before I = Prt
receipt
3. Pay for an expense before it = (Principal amount) x (rate) x
is incurred (time)
4. Receive payment before it
= (₱ 30, 000)(0.1)(1.5/12)
earned
= ₱ 375
THREE TYPES OF ACCOUNTS
DATE PARTICULA DEBIT CREDIT
REAL ACCOUNTS
RS
Included in the Statement of Dec. 31 Interest ₱ 375
Financial Position Receivable
NOMINAL ACCOUNTS Interest ₱ 375
Income
Accounts in the income
statement
MIXED ACCOUNTS 2. ACCRUED EXPENSE
Has the nature of both real and An expense incurred in a
nominal accounts particular period but not
Important Basic Accounting recorded/paid during that same
Concepts: period.
- Periodicity or time period Concept Debit: Interest Expanse
- Accrual Concept Credit: Interest Payable
- Revenue Realization Example
- Matching Charlotte has issued a ₱ 40, 000, 12%,
4-month note to a supplier on October
Types of Adjusting Entries 1.
Accrued Income I = Prt
A revenue item that have not = (₱ 40, 000)(0.12)(3/12)
been collected or recorded, but
= ₱ 1, 200
DAT PARTICULA CREDI
E RS DEBI T
T
Dec. Interest ₱
31 Expense 1200
Interest ₱ PREPAID EXPENSE (EXPENSE)
Payable 1200
Utility bills for the month of December
has not been recorded by Charlotte
amounting to ₱ 7, 500.
4. UNEARNED INCOME
DATE PARTICULA CREDI
RS DEBI T Deferred Income, a cash has
T been collected but not yet
Dec. Interest ₱ earned.
31 Expense 500
2 Methods of Recording
Interest ₱500
Payable REAL ACCOUNT/ ASSET
METHOD
NOMINAL/ EXPENSE METHOD
3. PREPAID EXPENSE
The entity may incur expenses without
the need to pay in cash since the
company has paid them in advance.
Loki received on March 1, Php 216,
2 Methods of Recording 000 for a year’s rent of a strategic
REAL ACCOUNT/ ASSET place for business in his place.
METHOD
NOMINAL/ EXPENSE METHOD
On Sept. 1, 2019, Charlotte paid ₱ 9,
000 for six month rent for a space in a
building.
PREPAID EXPENSE (ASSET)
16000* 5/12 =
16000* .416666666 = 6666.666
6. Doubtful Accounts / Bad Debts /
Uncollectible Accounts Expense
Methods of Accounting for Doubtful
Accounts
5. DEPRECIATION EXPENSE
Direct Write-off Method -
Used to recognize the Bad debts losses are not
usefulness of any plant asset, anticipated and no
except land. allowance accounts is used.
No entries are made for bad
debts until an account is
determined to be
uncollectible at which time
the loss is charged to Bad
ACCUMULATED DEPRECIATION Debts Expense.
A contra-asset account that EXAMPLE:
shows the cumulative sum of all
Charlotte’s Company writes off Rose
depreciation expense from the
Trading Company’s Php 9, 000 balance
acquisition date of the asset
as uncollectible on December 12 when
until the current period.
the company declared bankruptcy.
CONTRA ASSET ACCOUNT
An asset account with a normal
credit balance. Allowance Method -
Estimating and recording bad
STRAIGHT LINE METHOD
debts expense is required when
Depreciation is same for each it is deemed to be material in
year of the assets estimated amount. Expense for
life. uncollectible accounts is
properly matched against
revenues in the same
accounting period in which the
income was generated.
EXAMPLE
Charlotte purchased a sewing machine
worth 40, 000 on October 1. It was
estimated that the sewing machine’s
salvage value after its useful life of 7
years is Php 7, 000.
98000-2000 = 96000
96000/6 = 16000
EXAMPLE 1: ALLOWANCE METHOD
Charlotte has an accounts receivable
of Php 50, 000 on June 30. She
anticipated that some customers will
not pay the full amount and estimates
that Php 5, 000 will not be converted
to cash.
