Lesson 2
Lesson 2
Topic Session
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
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
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
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.
Dr. Cr.
Journal Entry: Rent Expense 8,000
Cash 8,000
Dr. Cr.
Adjusting Entry: Prepaid Rent 4,000
Rent Expense 4,000
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
Dr. Cr.
Adjusting Entry: Prepaid Insurance 9,600
Insurance Expense 9,600
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?
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
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
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
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
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.
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.
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.
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
___________________________________________________________
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
Depreciation _________________
_________________
Unearned Revenues
Liability 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.
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.
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
References
Book:
Ballada, Win. 2017. Fundamentals of Accountancy Business & Management
1. Manila, Philippines. DomDane Publishers. pp. 202-214.