0

Fundamentals of SENIOR
Accountancy, Business HIGH
and Management 1 (FABM 1) SCHOOL

Self-Learning

Preparing of
Module

Adjusting Entries
1
666
Quarter 4
Fundamentals of Accountancy, Business and Management 1
Quarter 4 – Self-Learning Module 1: Preparing of Adjusting Entries
First Edition, 2020

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Development Team of the Self-Learning Module

Writer: Jeany Rose P. Agbisit

Editor: Edna D. Camarao, PhD., Dennis T. Alex
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Management Team: Ma. Evalou Concepcion A. Agustin
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 Fundamentals of
SENIOR
Accountancy, Business HIGH
and Management 1 SCHOOL

(FABM 1)

Self-Learning
Module
Preparing of
1
Adjusting Entries
12
Quarter 4
Introductory Message

For the facilitator:

Welcome to the Senior High School – Fundamentals of Accountancy, Business

and Management 1 Quarter 4 of Self Learning Module on Preparing of Adjusting
Entries!

This Self-Learning Module was collaboratively designed, developed and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their own learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
For the learner:

Welcome to Fundamentals of Accountancy, Business and Management 1

Quarter 4 of Self Learning Module on Preparing of Adjusting Entries!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectations - This points to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.
 EXPECTATIONS

After going through this module, you are expected to:

1. define the adjusting entries;

2. enumerate types of adjusting entries and describe each;

3. interpret the effects of negligence of not preparing and recording of adjusting

entries; and
4. post transactions in the ledger.

PRETEST

Directions: Write TRUE if the statement is correct and FALSE if it is incorrect.

1. Adjusting entry consists of one permanent account and temporary account.

2. Preparing adjusting entries at the end of the accounting period is supported

by the matching principles as well as the accrual basis of accounting.
3. Recording the expired portion of a prepaid expense results in an increase to
the expense account and a decrease in the related prepaid expense account.
4. Under the expense method of recording prepayment, the initial entry is a debit
to a prepaid expense account.

5. If no adjusting entries are prepared, then the accounting process would

generate corrected financial statements.
 RECAP

Directions: Fill in the blanks.

1. _______________________ referred to as the book of final entry.
2. ________________________is the transferring of amounts from the journal to the
appropriate accounts in the ledger.
3. ____________________ is the process of writing down the account number of the
ledger in the PR column of the journal as well as the page number of the
journal where the entry was recorded in the PR column of the ledger4.
______________ is also known as the carrying value.
4-5. The accounts in the general ledger are classified into two general groups
4.________________ 5.__________________

LESSON

When accountants prepare financial statements, they assume that the

economic life of the business can be divided into time periods. Using this accounting
period concept, accountants must determine in which period the revenues and
expenses of the business should be reported. To determine the proper period,
accountants use generally accepted accounting principles, which require the use of
the accrual basis of accounting.
Under the accrual basis of accounting, revenues are reported in the income
statement in the period in which they are earned. For example, revenue is reported
when the services are provided to customers. Cash may or may not be received from
customers during this period. The accounting concept that supports this reporting
of revenues is called the revenue recognition concept. Under the accrual basis,
expenses are reported in the same period as the revenues to which they relate. For
example, employee wages are reported as an expense in the period in which the
employees provided services to customers, and not necessarily when the wages are
paid. The accounting concept that supports reporting revenues and related expenses
in the same period is called the matching concept, or matching principle. By
matching revenues and expenses, net income or loss for the period will be properly
reported on the income statement. Although generally accepted accounting
principles require the accrual basis of accounting, some businesses use the cash
basis of accounting. Under the cash basis of accounting, revenues and expenses are
reported in the income statement in the period in which cash is received or paid. For
example, fees are recorded when cash is received from clients, and wages are
recorded when cash is paid to employees. The net income (or net loss) is the difference
between the cash receipts (revenues) and the cash pay

ADJUSTING PROCESS
❖ Is the analysis and bringing up to-date the accounts at the end of the period
before the financial statements are prepared.

ADJUSTING ENTRIES
❖ The journal entries that bring the accounts up to date at the end of the
accounting period All adjusting entries affect at least one income statement
account and one balance sheet account. Thus, an adjusting entry will always
involve a revenue or an expense account and an asset or a liability account.

CHARACTERISTICS OF ADJUSTING ENTRIES:

1. It is prepared at the end of the accounting period

2. It has no cash account in either debit or credit.

3. It has one balance sheet account and one income statement account.
REASONS WHY ADJUSTING ENTRIES ARE PREPARED

1. Some income although already earned are not yet included in the trial
balance.
2. Some expenses although expired are not yet included in the trial
balance.

3. Some assets in the trial balance should be expired or used up.

4. Some liabilities in the trial balance should be recognized as earned.

5. Some income reported in the trial balance are still unearned.

6. Some expenses reported in the trial balance are still unexpired.
TYPES OF ADJUSTING ENTRIES:

1. Prepaid expense (deferred expense)

2. Unearned revenue (deferred revenue)

3. Accrued revenue (accrued asset)

4. Accrued expense (accrued liability)

5. Depreciation expense

Each entry will always affect both a balance sheet and an income statement account.
TYPES OF ADJUSTING ENTRIES:
1. ACCRUED EXPENSES
❖ It is a liability account
❖ Expenses already incurred but not yet paid
❖ Also called accrued liability or accrued payable.

Illustration #1:
Assume that on Sept 30, 2018 the company had unpaid taxes
amounting to P10,000. The tax pertains to the month of Sept but is
will be paid in October.
One income statement account (nominal
ADJUSTING ENTRY: account since it is an expense)
Date Particulars Debit Credit
2019
Sept 30 Taxes Expense 10 0 0 0 -
Taxes Payable 10 0 0 0 -
To take up accrued expenses at Sept.30

Take note:
Failure to prepare the adjusting entry above, will result to taxes expense for the
month of September to be understated, resulting to an overstatement in the net income
for the month of September. On the other hand, the taxes payable will not be reflected
in the balance sheet thereby understating the total liabilities of the company at Sept.
30, 2011.

Let us explain further. Looking at this example. There is a discrepancy of P10,000.

Recorded Adjustment Unrecorded Adjustment

Revenues Php 50,000 Revenues Php 50,000

Less: OPEX Less: OPEX
Taxes Expense 10,000 Taxes Expense 0
Net Income Php 40,000 Net Income Php 50,000

Understated (kulang) Overstated (sobra) because

there we did not record the
adjustment of P10,000.
 Illustration #2:
Assume the company is paying a weekly salary of P50,000 to its
employees for a 5-day work week. Payday is every Friday. During the
month of March, salaries paid to employees are shown in the T-account
below:
Wages Expense
Mar. 5 50 0 0 0-
Mar. 12 50 0 0 0-
Mar. 19 50 0 0 0-
Mar. 26 50 0 0 0-
200 0 0 0-

If March 26 is a Friday, then the last day of the month (March 31) falls on a
Wednesday. Since payday is every Friday, the next payment of salaries would be
April 2. Therefore, as of March 31, the salaries pertaining to Monday (March 29),
Tuesday (March 30) and Wednesday (March 31) is accrued because it would be
paid in the next payday April 2. The accrued salaries at March 31, is 3 days (Mon-
Wed) which amounts to P30,000, computed as follows:

MARCH
MON TUE WED THU FRI
26
29 30 31

Total weekly salary P50,000

÷ by no. of working days in a week 5
Ave. salary per day P10,000
x by accrued no. of days _ 3
Accrued salaries, at March 31 P30,000

ADJUSTING ENTRY:
Date Particulars Debit Credit
2019
Mar 31 Wages Expense 30 0 0 0 -
Wages Payable 30 0 0 0 -
To take up accrued wages at March 31.
 Since the 3 days accrued salaries as of March 31, pertains to salaries for the
month of March, it has to be included in the salaries expense for the month of March
by preparing an adjusting entry. The income statement prepared by the company for
the month of March would show Salaries Expense of P230,000, the salaries which
had been paid amounting to P200,000 as shown in the t-account plus the accrued
salaries of P30,000.

MARCH
MON TUE WED THU FRI
26
29 30 31

2. ACCRUED REVENUE
❖ An asset account
❖ Revenue already earned by the business but not yet received or
collected at the end of the accounting period.

Illustration #1:
El Nido Apartelle is in the business of renting apartments. The company
prepares income statement on a monthly basis. As of August 31, 2018, a tenant has
not paid the August rent amounting to P8,000.

El Nido must have to prepare the adjusting entry on August 31, 2018, in order
to take up the revenue which is already earned but not yet received.

ADJUSTING ENTRY:
Date Particulars Debit Credit
2018
Aug 31 Rent Receivable 8 0 0 0-
Rent Revenue 8 0 0 0-
To take up the accrued rent revenue
as of August 31, 2018.
Illustration #2:
On October 1, 2017, LBC Company received a 6-month, 10% promissory note
from a customer in the amount of P100,000.

ADJUSTING ENTRY:
Date Particulars Debit Credit
2017
Dec 31 Interest Receivable 2 5 0 0-
Interest Income 2 5 0 0-
To take up the accrued interest revenue
at December 31, 2017

Computation:
FV of the N/R P100,000
x by interest rate 10%
Interest for 1 yr. P 10,000
x by accrued # of mos. 3/12
Accrued interest from
Oct. 1 to Dec. 31 P 2,500

3. PREPAID EXPENSE OR DEFERRED EXPENSES

❖ Prepaid Expenses are expenses paid in advance. Since the benefits
will be received in the future, prepaid expenses are treated as asset.
They are expected to become expenses through the passage of time or
through use and consumption

***The adjusting entries for prepaid expenses depend upon the method used
to record the prepayment. The two methods of recording prepaid expenses are the
ASSET METHOD or the EXPENSE METHOD.

A. ASSET METHOD – the account debited upon payment is an ASSET

account. Upon adjustment, an expense account is debited with a
corresponding credit to an asset account.

B. EXPENSE METHOD – the account debited upon payment is an

EXPENSE account. Upon adjustment, an ASSET account is debited and
an expense account is credited.
Illustration #1:
Eastern Union Money Transfer, started business on January 2, 2017. On Jan.
3, the company purchased office supplies amounting to P8,000. The entry to record
the purchase of the office supplies under the asset and the expense methods are:

Asset Method kasi yung debit

entry ay asset account
ASSET METHOD
Date Particulars Debit Credit
2017
Jan 3 Office Supplies 8 0 0 0-
Cash 8 0 0 0-
To record the purchase of office supplies
EXPENSE METHOD
Date Particulars Debit Credit
2017

Jan 3 Office Supplies Expense 8 0 0 0-

Cash 8 0 0 0-
To record the purchase of office supplies

Expense Method kasi yung

debit entry ay expense account

If on January 31, 2017, the remaining unused office supplies amounts to

P2,000, it means that the amount of office supplies used during the month of
January amounts to P6,000.

Let us have the T-account to explain further.

ASSET METHOD EXPENSE METHOD

Office Supplies Office Supplies Expense
8 0 0 0- 6 0 0 0- 8 0 0 0- 2 0 0 0-
2 0 0 0- 6 0 0 0-

unused
used
 Para raw maging P2,000 na lang ang Office supplies (asset method) anu yung
adjustment nten? So ang adjustment naten ay dapat ganito base sa t-account naten
na nasa ibaba.

ADJUSTING ENTRY:
ASSET METHOD
Date Particulars Debit Credit
2017

Jan 31 Office Supplies Expense 6 0 0 0-

Office Supplies 6 0 0 0-
To record the used portion of the office
supplies at Jan. 31, 2017.

T-ACCOUNT
ASSET METHOD
Office Supplies
8 0 0 0- 6 0 0 0-
2 0 0 0-

Para raw maging P6,000 na lang ang Office supplies Expense (expense
method) anu yung adjustment nten? So ang adjustment naten ay dapat ganito base
sa t-account naten na nasa ibaba.

ADJUSTING ENTRY:
EXPENSE METHOD
Date Particulars Debit Credit
2017

Jan 31 Office Supplies 2 0 0 0-

Office Supplies Expense 2 0 0 0-
To record the unused portion of the office
supplies at Jan. 31, 2017.

T-ACCOUNT
EXPENSE METHOD
Office Supplies Expense
8 0 0 0- 2 0 0 0-
6 0 0 0-
 4. UNEARNED REVENUES OR DEFERRED REVENUES
❖ A liability account
❖ Are revenues collected or received in advance by the business.
❖ These revenues are not yet earned but already collected or received by
the business.

TWO METHODS OF RECORDING UNEARNED REVENUE

1. LIABILITY METHOD – the account credited upon receipt of cash is

a liability account. Upon, adjustment, such liability account will be
debited and a revenue account is credited.
2. REVENUE METHOD – the account credited upon receipt of cash is
a REVENUE or INCOME account. Upon, adjustment, a revenue
account is debited and a liability account is credited.

Illustration #1:
On October 1, 2018, El Nino Apartelle, received P120,000 from SIS
Company, a tenant occupying an office space in the building. The amount is
for one year beginning month of October paid in advance by SIS.

LIABILITY METHOD
Date Particulars Debit Credit
2018
Oct 1 Cash 120 0 0 0 -
Unearned Rent Income 120 0 0 0 -
To record the receipt of advance payment
INCOME METHOD
Date Particulars Debit Credit
2018

Oct 1 Cash 120 0 0 0 -

Rent Income 120 0 0 0 -
To record the receipt of advance payment
 Para raw maging P90,000 na lang ang Unearned Rent Income (Income
Method) ano yung adjustment natin? So ang adjustment natin ay dapat ganito base
sa t-account naten na nasa ibaba

ADJUSTING ENTRY:
LIABILITY METHOD
Date Particulars Debit Credit
2018

Dec 31 Unearned Rent Income 30 0 0 0 -

Rent Income 30 0 0 0 -
To take up the earned portion of the
rent income.

T-ACCOUNT
LIABILITY METHOD
Unearned Rent Income
30 0 0 0 - 120 0 0 0 -
90 0 0 0 -

Para raw maging P30,000 na lang ang Unearned Rent Income (Income
Method) ano yung adjustment natin? So ang adjustment natin ay dapat ganito base
sa t-account naten na nasa ibaba

ADJUSTING ENTRY:
INCOME METHOD
Date Particulars Debit Credit
2018

Dec 31 Rent Income 90 0 0 0 -

Unearned Rent Income 90 0 0 0 -
To take up the unearned portion of the
rent income.

T-ACCOUNT
INCOME METHOD
Rent Income
90 0 0 0 - 120 0 0 0 -
30 0 0 0 -
Computation for earned portion as of Dec. 31, 2018:
Rent received in advance P120,000
÷ by # of mos. Covered by
amount received 12
Monthly rental P 10,000
x by # of mos. from Oct.1
to Dec. 31, 2018 3
Earned portion of the rent
received in advance P 30,000

5. DEPRECIATION OF PPE
❖ Property, Plant and Equipment
❖ Physical resources that are owned and used by a business which are
relatively fixed or permanent in nature that have a long useful life
❖ Sometimes called fixed assets or plant assets

**The amount debited to Depreciation Expense is that portion of fixed asset cost that
is charged to expense. Accumulated Depreciation is a contra-asset account. The credit
is not made directly to the fixed asset account in order to preserve the original cost of
the fixed asset.

Date Particulars Debit Credit

xxx

xxx xxx Deprectiation Expense (name of the asset) xx x x -

Accumulated Depreciation (name of the asset) x x x x-
To record the depreciation expense.

Factors to be considered in computing depreciation (using the straight line

method)
1. Asset Cost – includes its purchase price plus other direct costs
incurred in acquiring and bringing the asset to its intended use.
Examples of these other costs are freight cost and installation cost.

2. Estimated Residual Value– estimated amount the fixed asset can be

sold at the end of its useful life. Other terms used are salvage value,
scrap value, or trade in value.

3. Estimated useful life – expressed in years or number of units, or hours

that the asset can be used.
There are several methods of computing depreciation, the most common are:
1. Straight-line method
2. Sum-of-the-years digit method
3. Declining balance method
4. Units of production method

STRAIGHT LINE METHOD FORMULA:

1. Depreciation Expense
Cost of PPE P xxx
Less: Estimated Scrap Value (xxx)
Depreciable Cost P xxx
÷ by estimated useful life x
Annual depreciation also
the depreciation expense P xxx

2. Book Value
Cost of PPE P xxx
Less: Annual depreciation ____xxx
Book Value P xxx

Illustration #1:
On September 1, 2017, DHL Delivery Services purchased a delivery truck for
a total cost of P960,000. The estimated useful life of the truck is 8 years, at the end
of which it is estimated to be sold for P80,000. Assume the company is using the
SLM.
COMPUTATION:

Cost of delivery of truck ₱ 960,000

Less: Estimated Scrap Value 80,000
Depreciable cost ₱ 880,000
÷ by estimated useful life 8
Annual depreciation ₱ 110,000
÷ by # of months in a year 12
Monthly depreciation ₱ 9,167
x by nos. of mos. (Sep-Dec) 4
Depreciation Expense for 4 mos ₱ 36,667

Since the delivery truck was acquired on September 1, 2017, the depreciation
expense for the year 2017 is only for four (4) mos. The succeeding year’s depreciation
will be P110,000, the annual depreciation.
ADJUSTING ENTRY:
Date Particulars Debit Credit
2017

Dec 31 Deprectiation Expense- Machinery 36 6 6 7 -

Accumulated Depreciation-Machinery 36 6 6 7 -
To record the depreciation expense.

6. UNCOLLECTIBLE ACCOUNTS
❖ Relates to the company’s receivables which might not be collected.
❖ To comply with the matching principle, companies prepare adjusting
entry to recognize the anticipated loss that the business might incur
arising from these uncollectible accounts
Date Particulars Debit Credit
XXX
XXX XX Doubtful Accounts Expense xxx x x x -
Allowance for Doubtful Accounts xxx x x x -
To take up provision for the uncollectible
accounts.

Illustration #1:
Assume that on December 31, 2017, the end of the company’s annual
accounting period, the company has outstanding accounts receivable or P400,000.
The company estimates that 4% of these receivables might not be collected. The
allow. For uncollectible account has no balance.

ADJUSTING ENTRY:
Date Particulars Debit Credit
2017
Dec 31 Doubtful Accounts Expense 16 0 0 0 -
Allowance for Doubtful Accounts 16 0 0 0 -
To take up provision for the uncollectible
accounts. (P400,000 x 4% = P16,000)
 ACTIVITIES

Activity 1 Solve the following problems:

1. A commission income account in the trial balance at the end of the year
showed a balance of Php12,000.1/5 of the amount is already earned.
a. What type of adjustment is used?
b. What is the year end adjusting entry?
2. A prepaid rent account amounting to Php600,000 was shown in the trial
balance on December 31, 2018. Accordingly, the account is good for one year
and was paid on May 1, 2013.
a. What is the amount of the adjustment?
b. What is the adjusting entry?
3. An unearned subscription of Php360,000 was credited when it was received
on April 1, 2020 good for one year.
a. How much is the balance of unearned subscription at the end of
December 31, 2019?
b. What is the amount of the adjustment?
4. Gloria Dimasalang acquired Office Equipment costing P352,800 on April 1,
2019. The equipment is expected to last 5 years father which it will be
worthless.
a. How much is the balance of unearned subscription at the end of
December 31, 2019?
b. What is the amount of the adjustment?

Activity 2
Prepare the adjusting entries.

1. Quirk Company purchased office supplies costing P6,000 and debited Office
Supplies for the full amount. At the end of the accounting period, a physical
count of office supplies revealed P2,400 still on hand. The appropriate
adjusting journal entry to be made at the end of the period would be?

2. Hardy Company purchased a computer for $4,800 on December 1. It is

estimated that annual depreciation on the computer will be $960. If financial
statements are to be prepared on December 31, what should be the adjusting
journal entry?

3. Baden Realty Company received a check for P18,000 on July which represents
a 6-month advance payment of rent of a building it rents to a client.
 Unearned Rent was credited for the full P18,000. Financial statements will be
prepared on July 31. Give the adjusting journal entry Baden Realty Company
should make.

4. At December 31, 2018, before any year-end adjustments, Karr Company’s

Insurance Expense account had a balance of $1,450 and its Prepaid
Insurance account had a balance of $3,800. It was determined that $3,000 of
the Prepaid Insurance had expired. The adjusted balance for Insurance
Expense for the year would be?

5. Manning Corporation issued a one-year, 9%, P200,000 note on April 30, 2018.
Interest Expense for the year ended December 31, 2018 was?

WRAP-UP
To summarize what you have learned in the lesson, answer the following
questions:

1. Give the characteristics of adjusting entries.

2. Summarize the adjusting process.
3. Give the 6 types of adjustments and describe each.

VALUING

Reflect on this!

"When it is obvious that the goals cannot be reached,

don’t adjust the goals, adjust the action steps.” -Confucius
1. What do you mean by the above quotations?
2. How will you able to apply this in your life as a student?
 POSTTEST

Directions: Identify each item below. Write your answer before the item number.

_____1. If the pre-payment is initially recorded as asset, part of the year-end

adjustment will be
a. Debit to expense
b. Debit to asset
c. Credit to liability
d. Credit to income
_____ 2. Which of the following is an example of an adjusting entry?
a. Record the billing of customers for services rendered
b. Record depreciation of a truck
c. Record the payment of wages to employees
d. Record the purchase of supplies on account

For numbers 3-4

Ingle paid P12,960 for a four-year insurance policy on September 1 and recorded the
P12,960 as a debit to prepaid insurance and a credit to Cash.
_____3. What of adjusting entry is illustrated above?
a. Accrued Expense
b. Prepaid Expense
c. Accrued Income
d. Unearned Income
_____4. What adjusting entry should Ingle make on December 31, the end of the
accounting period?
a. Insurance Expense 1,080
Prepaid Insurance 1,080
b. Insurance Expense 1,800
Prepaid Insurance 1,800
c. Prepaid Insurance 1,080
Insurance Expense 1,080
d. Prepaid Insurance 1,800
Insurance Expense 1,800
_____ 5. On January 10, Decoy received advance payment of services. The required
services were performed in February and the actual billing, accounting for the
amount of services rendered were sent to client in March. The revenue under accrual
should be included in the report for:
a. January
b. February
c. March
d. Either January or February
 KEY TO CORRECTION

5. Income Statement accounts

4. Balance Sheet accounts
3. Cross Reference
2. Posting
1. Ledger
RECAP B 5.
A 4.
5.FALSE B 3.
4.FALSE B 2.
3.TRUE A 1.
2.TRUE POSTTEST
1.TRUE
PRETEST

References

Ballada, W. 2017. Fundamentals of Accountancy, Business, and Management

1. VDomDane Publishers.

Banggawan, RB. Asuncion, DJ. 2017. Fundamentals of Accountancy,

Business, and Management 1. Real Excellence Publishing.

Hernane, Milagros B. et.al. 2014. Principles of Accounting

Rabo, JS. Tugas,FC.Salendrez, HE. 2016. Fundamentals of Accountancy,

Business, and Management 1. Vibal Group Inc.

Valencia, Edwin G. 4th Edition. Basic Accounting (Concepts, Principles,

Procedures and Applications). Valencia Educational Supply