Tanauan Institute, Inc.

– Senior High School Department

TANAUAN INSTITUTE, INC.

Senior High School Department

Modified Learning Scheme : Workbook

Fundamentals of Accountancy, Business, and Management 2
1st Semester, S.Y. 2020-2021
Subject Teacher: ____________________

Name: ___________________________________ Score: ________________

Section: __________________________________ Date: _________________

Topic Session

Adjustments for Deferrals Chapter 2

Objectives of the Lesson

At the end of the lesson, the student should be able to:
1. Determine the adjusting accounts that are involved in an adjusting
transaction.
2. Compute for the right adjustment amount.
3. Write the correct adjusting entry.

Values Integration
Perseverance. The attitude that no matter how difficult an issue or a
problem maybe one will still continue until he or she succeeds. The lesson
that will be discussed involves analytical thinking which will require the
perseverance of the students in order to learn it.

Vocabulary
Prepaid Expenses – Expense paid in advance.
Accrued Expenses – Expenses that are incurred but not yet paid.
Depreciation – It is the decrease in the market value of long lived assets
due to the wear and tear that it incurs in the course of its useful life.

Discussion
Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 1
 Tanauan Institute, Inc. – Senior High School Department

Adjustment for Deferrals

Allocating Assets to Expense
Entities often make expenditures that benefit more than one accounting period. These
expenditures are generally debited to an asset account. At the end of each accounting
period, the estimated amount that has expired during the period or that has benefited
the period is transferred from the asset account to an expense account. Two kinds of
asset that has to be adjusted into expense are prepaid expenses, and depreciation of
property and equipment.
Prepaid Expenses
Some expenses are customarily paid in advance, hence the name prepaid expense.
One must remember the following facts about prepaid expense:
 Prepaid expenses are assets, not expenses.
 The portion of the prepaid expense that has expired becomes expense.
 Prepaid expense expire either with the passage of time or through use and
consumption.
There are three kinds of prepaid expense, namely prepaid rent, prepaid insurance, and
supplies. There are two ways of treating these account titles. First is to record it as an
asset first, then at the end of the accounting period compute the portion that has expired
and allocate that portion as an expense. This is called the Asset Method. On the other
hand, one can record prepaid expense as an expense first, then at the end of the
accounting period compute the portion which are still unexpired and allocate that portion
as an asset. This is called the Expense Method. Both method will be demonstrated in
this lesson.
 Recording and Adjusting Transaction using Asset Method
Prepaid Rent. On May 1, Makabayan Enterprise paid P8,000 for two months’
rent in advance.
Question: What will be the journal entry?
Analysis: Assets (prepaid rent) increased. Assets (cash) Decreased.
Dr. Cr.
Journal Entry: Prepaid Rent 8,000
Cash 8,000

Adjustment: By May 31, what will be the adjusting entries?

Transaction: Expiration of one month’s rent.
Analysis: Asset (prepaid rent) decreased. Expense (rent expense)
Increased resulting to a decrease in Owner’s Equity.
Computation: P8,000/2 = P4,000

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 2

 Tanauan Institute, Inc. – Senior High School Department

By dividing 8,000 to 2 (months), we will get the value of one

month’s rent, which is P4,000.

Dr. Cr.
Adjusting Entry: Rent Expense 4,000
Prepaid Rent 4,000

After the adjustments, the prepaid rent account has a balance of P4,000 (prepayment of
P8,000 less the P4,000 expired portion); the rent expense account reflects the P4,000
(P8,000/2 months) expense for a month.
Prepaid Insurance. Makabayan Enterprise acquired a one-year comprehensive
insurance coverage on the service vehicle and paid P14,400 premium.
Question: What will be the journal entry?
Analysis: Assets (prepaid insurance) Increase. Assets (cash) Decrease.

Dr. Cr.
Journal Entry: Prepaid Insurance 14,400
Cash 14,400

Adjustment: After 4 months, what will be the adjusting entries?

Transaction: Expiration of four months’ insurance.
Analysis: Asset (prepaid insurance) decreased. Expense (insurance
expense) Increased resulting to a decrease in Owner’s
Equity.
Computation: P14,400/12 = P1,200 X 4 = P4,800
By dividing P14,400 to 12 (months) which is equivalent to one year,
we will get the value of one month’s insurance, which is P1,200. By
multiplying P1,200 to 4 (months) we will get the value of four
month’s insurance that had expired, which is P4,800.

Dr. Cr.
Adjusting Entry: Insurance Expense 4,800
Prepaid Insurance 4,800

The prepaid insurance account has a balance of P9,600 (P14,400 prepayment less
P4,800) and insurance expense reflects the expired cost of P4,800 (P14,400/12months
= P1,200X4months = P4,800)for four months of business operation.
Supplies. On May 8, Makabayan Enterprise purchased supplies, P18,000.
Question: What will be the journal entries?
Analysis: Assets (supplies) Increase. Assets (cash) Decrease.

Dr. Cr.
Journal Entry: Supplies 18,000
Cash 18,000

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 3

 Tanauan Institute, Inc. – Senior High School Department

Adjustment: At the end of the accounting period, Gevera makes a careful physical
inventory of the supplies. The inventory count showed that supplies costing P15,000 are
still on hand. What will be the adjusting entries?
Transaction: Consumption of supplies.
Analysis: Asset (supplies) decreased. Expense (supplies expense)
Increased resulting to a decrease in Owner’s Equity.
Computation: P18,000 - P15,000 = P3,000
By subtracting P18,000 with P15,000 we will get the value of the
supplies the was consumed or used by the business at the end of
the accounting period, which is P3,000.

Dr. Cr.
Adjusting Entry: Supplies Expense 3,000
Supplies 3,000

The asset account supplies now reflect the adjusted amount of P15,000 (May 8 supplies
purchase of P18,000 less P3,000). In addition, the amount of supplies expensed during
the accounting period is reflected as P3,000.

 Recording and Adjusting Transaction using Expense Method

Rent. On May 1, Makabayan Enterprise paid P8,000 for two months’ rent in
advance.
Question: What will be the journal entry?
Analysis: Expense (rent expense) increased resulting to a decrease in Owner’s
Equity. Assets (cash) Decreased.

Dr. Cr.
Journal Entry: Rent Expense 8,000
Cash 8,000

Adjustment: By May 31, what will be the adjusting entries?

Transaction: Expiration of one month’s rent.
Analysis: Asset (prepaid rent) Increased. Expense (rent expense)
Decreased resulting to an Increase in Owner’s Equity.
Computation: P8,000/2 = P4,000
By dividing 8,000 to 2 (months), we will get the value of one
month’s rent that is still unused, which is P4,000.

Dr. Cr.
Adjusting Entry: Prepaid Rent 4,000
Rent Expense 4,000

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 4

 Tanauan Institute, Inc. – Senior High School Department

After the adjustments, the prepaid rent account has a balance of P4,000 (P8,000/2
months); the rent expense account reflects the P4,000 (prepayment of P8,000 less the
P4,000 unused portion) expense for a month.
Prepaid Insurance. Makabayan Enterprise acquired a one-year comprehensive
insurance coverage on the service vehicle and paid P14,400 premium.
Question: What will be the journal entry?
Analysis: Assets (insurance expense) Increase resulting to a Decrease in
Owner’s Equity. Assets (cash) Decrease.

Dr. Cr.
Journal Entry: Insurance Expense 14,400
Cash 14,400

Adjustment: After 4 months, what will be the adjusting entries?

Transaction: Expiration of four months’ insurance.
Analysis: Asset (prepaid insurance) Increased. Expense (insurance
expense) Decrease resulting to an Increase in Owner’s
Equity.
Computation: P14,400/12 = P1,200 X 9 = P9,600
By dividing P14,400 to 12 (months) which is equivalent to one year,
we will get the value of one month’s rent, which is P1,200. By
multiplying P1,200 to 9 (months) we will get the value of the prepaid
insurance, which is P9,600.

Dr. Cr.
Adjusting Entry: Prepaid Insurance 9,600
Insurance Expense 9,600

The prepaid insurance reflects the unexpired amount of P9,600 (P14,400/12months =

P1,200X8months = P9,600) and insurance expense has a balance of P4,800 (P14,400
– P9,600) for four months of business operation.
Supplies. On May 8, Makabayan Enterprise purchased supplies, P18,000.
Question: What will be the journal entries?
Analysis: Expense (supplies expense) Increase which results to a Decrease in
Owner’s Equity. Assets (cash) Decrease.

Dr. Cr.
Journal Entry: Supplies Expense 18,000
Cash 18,000

Adjustment: At the end of the accounting period, Gevera makes a careful physical
inventory of the supplies. The inventory count showed that supplies costing P15,000 are
still on hand. What will be the adjusting entries?

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 5

 Tanauan Institute, Inc. – Senior High School Department

Transaction: Consumption of supplies.

Analysis: Asset (supplies) Increase. Expense (supplies expense)
Decrease resulting to an Increase in Owner’s Equity.
Computation: The amount that of the supplies that was still unused was
already stated in the transaction, which is P15,000.

Dr. Cr.
Adjusting Entry: Supplies 15,000
Supplies Expense 15,000

The asset account supplies now reflect the adjusted amount of P15,000 (as stated in
the transaction that the supplies on hand was P15,000 in value). In addition, the amount
of supplies expense has a balance of P3,000 (May 8 purchase worth P18,000 less
P15,000 supplies that are still unused).
Remember: In our discussions and activities, the asset method is always used unless
specified.
Depreciation of Property and Equipment
When an entity purchases long-lived assets such as buildings, service vehicles,
computers or office furniture, it is basically buying or prepaying for the usefulness of that
asset. We notice that such assets decrease their usability because of the wear and tear
over the passage of time. Therefore, it is common knowledge that the value of the asset
decrease over time. The decrease in the value of long-lived or fixed assets is referred to
as depreciation.
In our lesson, depreciation or depreciation expense is the estimated amount allocated to
any accounting period. Accountants estimate periodic depreciation. There are many
methods of computing depreciation but the simplest procedure is called the straight-line
method. The formula for determining the amount of depreciation expense at the end of
an accounting period using this method is:
Asset Cost xx
Less: Estimated Salvage Value xx
Depreciable Cost xx
Divided by: Estimated Useful Life xx
Depreciation Expense for each time period xx
Where:
 Asset Cost is the amount an entity paid to acquire the depreciable asset.
 Estimated Salvage Value is the amount that the asset can probably be sold for at
the end of its estimated useful life.
 Estimated Useful Life is the estimated number of periods that an entity can make
use of the asset. Useful life is an estimate, not an exact measurement.

When recording depreciation expense, the asset account is not directly reduced.
Instead, the reduction is recorded in a contra-asset account called accumulate

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 6

 Tanauan Institute, Inc. – Senior High School Department

depreciation. A contra account is used to record reductions in a related account and its
normal balance is opposite that of the related account.
Use of the contra account – accumulated depreciation – allows the disclosure of the
original cost of the related asset in the balance sheet. The balance of the contra
account is deducted from the cost to obtain the book value of the property and
equipment.

Example: Makabayan Enterprise estimated that the service vehicle, which was bought
on May 4 for P300,000, will last for seven years (eighty-four months) and with a salvage
value of P20,000. The office equipment that was acquired on May 5 for P60,000 will
have a useful life of five years (sixty months) and will be worthless at that time.
Question: What will be the journal entry?
Analysis: Assets (service vehicle & equipment) Increase. Assets (cash)
Decrease.
Dr. Cr.
Journal Entry: May 4 Service Vehicle 300,000
Cash 300,000
5 Equipment 60,000
Cash 60,000

Adjustment: At the end of the accounting period (makabayan enterprise is using

calendar year for its accounting period), what will be the adjusting entries?
Transaction: Recording depreciation expense.
Analysis: Asset Decreased. Expense Increased which resulted to a
Decrease in Owner’s Equity.
Computation:Straight line method:
Depreciation Expense for one month = (Asset Cost – Salvage Value)/Useful Life
(Service Vehicle) = (300,000 – 20,000)/84
= 280,000/84
= P3,333.33

Depreciation Expense for one month = (Asset Cost – Salvage Value)/Useful Life
(Equipment ) = (60,000 – 0)/60
= 60,000/60
= P1,000

Now, in order to get the depreciation expense of the period, we will multiply the
depreciation expense of service vehicle and equipment with number of months that had
passed between the purchase dates until the end of the accounting period. Since
Makabayan Enterprise is using the calendar year, therefore roughly 8 months had
already passed. By multiplying 8 months to the monthly depreciation expense of service

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 7

 Tanauan Institute, Inc. – Senior High School Department

vehicle and equipment we will arrive with two acceptable format for adjusting entries
and amounts.
FORMAT 1 Dr. Cr.
Adjusting Entry: Dec. 31 Depreciation Expense 26,666.64
Accumulated Depreciation –
Service Vehicle 26,666.64

Dec.31 Depreciation Expense 8,000

Accumulated Depreciation –
Equipment 8,000

FORMAT 2
Adjusting Entry: Dec.31 Depreciation Expense 34,666.64
Accumulated Depreciation –
Service Vehicle 26,666.64
Accumulated Depreciation –
Equipment 8,000

Note: Format 1 is more specific while Format 2 is more convenient. In the discussion
and activities, it is advised that Format 2 must be used.

Allocating Revenues Received in Advance to Revenues

There are times when an entity receives cash for services or goods even before service
is rendered or goods are delivered.
The account title that is used to refer to the cash that are paid in advance for the service
or goods not yet rendered or delivered is unearned revenue or unearned income. There
are two ways of treating unearned revenue namely, the liability methods and the
revenue method.
Unearned Revenues (Liability Method)
On June 1, Makabayan Enterprise received P10,000 as an advance payment for
services to be rendered on June, July, August, and September.
Question: What will be the journal entry?
Analysis: Assets (cash) Increased. Liability (unearned revenue) Increased.

Dr. Cr.
Journal Entry: Cash 10,000
Unearned Income 10,000

Adjustment: At the end of the month of August, what will be the adjusting entries?
Transaction: Recognition of income where cash is received in advance.

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 8

 Tanauan Institute, Inc. – Senior High School Department

Analysis: Liabilities (unearned revenue) Decreased. Income (service

income) Increased which results to an Increase in Owner’s
Equity.
Computation:P10,000/4 months = P2,500 X 3 months = P7,500
In order to get the income that was realized, P10,000 was divided
by four months since the advance payment was for services to
rendered for June, July, August, and September (exactly 4
months). This is done in order to get the income that was realized
every month which is P2,500. Then, P2,500 was multiplied by 3
months (from June to August), in order to get the realized income at
the end of August which is P7,500.

Dr. Cr.
Adjusting Entry: Unearned Income 7,500
Service Income 7,500

The liability account unearned revenue/income reflects the service income still to be
earned, P2,500 (P10,000 – P7,500). The revenue/income account reflects the amount
of service rendered and considered/realized as income at the end of August, P7,500
(P2,500 X 3 months).
Unearned Revenues (Revenue Method)
On June 1, Makabayan Enterprise received P10,000 as an advance payment for
services to be rendered on June, July, August, and September.
Question: What will be the journal entry?
Analysis: Assets (cash) Increased. Income (service income) Increased
which results to an Increase in Owner’s Equity.
Dr. Cr.
Journal Entry: Cash 10,000
Service Income 10,000

Adjustment: At the end of the month of August, what will be the adjusting entries?
Transaction: Recognition of unearned income where cash is received in
advance.
Analysis: Liabilities (unearned revenue) Increased. Income (service
income) Decreased which results to a Decrease in Owner’s
Equity.
Computation:P10,000/4 months = P2,500 X 1month = P2,500
In order to get the unearned income, P10,000 was divided by four
months since the advance payment was for services to rendered
for June, July, August, and September (exactly 4 months). This is
done in order to get the income that was realized every month
which is P2,500. Then, P2,500 was multiplied by 1 month
(September), in order to get the income that was not yet earned
which is P2,500.

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 9

 Tanauan Institute, Inc. – Senior High School Department

Dr. Cr.
Adjusting Entry: Service Income 2,500
Unearned Income 2,500

The liability account unearned revenue/income reflects the service income still to be
earned, P2,500 (P2,500 X 1 month, September). The revenue/income account reflects
the amount of service rendered and considered/realized as income at the end of
August, P7,500 (P2,500 X 3 months).
Note: In our discussions and activities, the liability method is always used unless
specified.
Things to Remember
Account Balances Before
Adjusting Entry
Adjustment
Types of
Income
Adjustment Balance Sheet Account Account
Statement
Account Debited Credited
Account
Prepaid Expenses:
Asset method Assets Expenses Expense Prepaid Expense
Overstated Understated (Asset)
Expense Assets Expenses Prepaid Expense Expense
method Understated Overstated (Asset)
Depreciation Assets Expenses Expense Contra Asset
Overstated Understated
Unearned Revenues:
Liability method Liabilities Income Unearned Revenues or
Overstated Understated Revenues Income
Income method Liabilities Income Revenue or Unearned
Understated Overstated Income Revenues
Accrued Liabilities Expenses Expense Payable
Expenses Understated Understated
Accrued Assets Income Receivable Revenue or
Revenues Understated Understated Income

Questions

1. What is difference if a prepaid expense is recorded as an asset first than

being recorded as an expense?
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 Tanauan Institute, Inc. – Senior High School Department

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2. When does a prepaid expense account truly become an expense

account?
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3. In this lesson what adjusting account is considered as a contra account?

What are the factors considered for its computation?
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Activity
Types of Accounts Affected. Complete the table by filling in the
accounts to be debited and to be credited in preparing the adjusting entries.
Deferrals: Account Debited Account Credited
Prepaid Expenses

Rent Asset Method _________________

_________________
Expense Method _________________
_________________

Supplies Asset Method _________________

_________________
Expense Method _________________
_________________

Insurance Asset Method _________________

_________________
Expense Method _________________
_________________

Depreciation _________________
_________________

Unearned Revenues
Liability Method _________________
_________________

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 11

 Tanauan Institute, Inc. – Senior High School Department

Income Method _________________

_________________

Quiz
Directions: Compute the depreciation expense for the following
independent cases and write the adjusting entry afterwards. Use the straight line
method of depreciation. Write your computation below the transaction. Note: All
the transactions use the calendar year.
1. Pedro Reyes purchased a delivery vehicle on January 1, 2016 amounting
to P250,000. It is estimated that the vehicle will be useful for 10 years. The
vehicle can be sold for P10,000 at the end of its useful life.

2. John Smith acquired an equipment of April 1, 2016 worth P54,000. It has

a useful life of 7 years and a salvage value of P5,000.

3. Refresh Inc. acquired a lot and building structure on August 30, 2016. The
lot is worth P1,500,000 and the building is worth P4,700,000 with a useful
life of 45 years and will be demolished afterwards.

Direction: Prepare the adjusting entry for Golden Gate Tours under each of the following
situations. The last day of the accounting period is Dec. 31. (Also show the computation
for the answer.)
a. Golden Gate Tours made a three years advance payment in rent worth P360,000
on September 1.

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 Tanauan Institute, Inc. – Senior High School Department

b. The payment of the P19,000 insurance premium for two years in advance was
originally recorded as Prepaid Insurance. One year of the policy has now
expired.

c. The Supplies account had a balance of P4,480 on Jan. 1. During the year,
P11,000 of supplies were bought. A year-end inventory showed that P6,400
worth of supplies are still on hand.

Reflection

What did you realize in this lesson?

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References
Book:
Ballada, Win. 2017. Fundamentals of Accountancy Business & Management
1. Manila, Philippines. DomDane Publishers. pp. 202-214.

Subject: Fundamentals of ABM 2 Topic: Adjustment for Deferrals Session: 2 Page | 13