Rules of Debit and Credit

Assets = Liabilities + Equity

Debit Credit Debit Credit Debit Credit
+ - - + - +

2
 Your ALLOWANCE! 

▪How do you budget your

ALLOWANCE?
Learning Objectives:
▪ Learners are expected to :
▪ define adjusting entries
▪ integrate honesty and responsibility in
recording transactions; and
▪ prepare adjusting entries using the general
journal.
 Adjusting Entries
for Service Business
5th Step

Prepared By:
Ms. Karole Nina G. Mandap, LPT
 Adjusting Entries
▪ The journal entries that bring the accounts up to date.
▪ Entries required at the end of each accounting
period to recognize on an accrual basis revenues and
expenses for the period.
▪ All adjusting entries affect at least one income
statement account and one balance sheet account
Classification of Adjusting Entries
1. Deferred expenses or prepaid expenses
2. Deferred Income or unearned income
3. Accrued expenses or accrued liabilities
4. Accrued income
5. Bad Debts / Doubtful Accounts
6. Depreciation Expense
 Basic Accounting Principles and Assumptions

▪1. Time Period Principle

▪2. Revenue Recognition/ Accrual
Accounting Principle
▪3. Matching Principle
Types of Adjusting
Entries
 Prepaid Expenses
▪ Expense that is paid but not yet
incurred
▪ Examples: insurance, taxes,
advertisements, rent, and supplies
 Two Methods of Recording
Prepaid Expenses

Expense
Asset Method
Method
 Asset Method
▪Record the transaction as
asset in the journal entry then
record the expense in the
adjusting entry
 Prepaid Expense – Rent (Asset Method)

On September 1, 2016, Etude House paid

P4,500 for six month rent in SM Mega Mall.
Etude House Journal Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Sept 1 Prepaid Rent 4,500

Cash To record advance 4,500
payment for rent for 6 mos

16
Prepaid Expense – Rent (Asset Method)

On September 1, 2016, Etude House paid

P4,500 for six month rent in SM Mega Mall.
Etude House Adjusting Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Rent Expense 3,000

Prepaid Rent 3,000
To adjust for prepaid rent

17
▪LET’S PRACTICE! 
 Prepaid Expense – Supplies (Asset Method)
LCUP bought supplies from National Book Store for
P1,000 cash on Jan. 1 2009. He used P600 throughout the
year.
Journal Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Jan 1 Supplies Inventory 1,000

Cash
To record purchased 1,000
supplies in cash

19
 Prepaid Expense – Supplies (Asset Method)
LCUP bought supplies from National Book Store for P1,000
cash on Jan. 1 2009. He used P600 throughout the year.
Adjusting Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Supplies Expense 600

Supplies Inventory 600
To adjust for supplies
inventory

20
 Expense Method
▪ Record the transaction as an
expense first in the journal
entry then record the
remaining prepaid expense in
the adjusting entry
Prepaid Expense-Rent (Expense Method)
On September 1, 2016, Etude House paid
P4,500 for six month rent in SM Mega Mall.
Etude House Journal Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Sept. 1 Rent Expense 4,500

Cash
To record payment for 4,500
rent for six months

22
Prepaid Expense- Rent (Expense Method)
On September 1, 2016, Etude House paid
P4,500 for six month rent in SM Mega Mall.
Etude House Adjusting Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Prepaid Rent 1,500

Rent Expense
To adjust for rent 1,500
expense

23
▪LET’S PRACTICE! 
Prepaid Expense – Supplies (Expense Method)
LCUP bought supplies from National Book Store for
P1,000 cash on Jan. 1 2009. He used P600 throughout the
year.
Journal Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Jan 1 Supplies Expense 1000

Cash
To record bought 1000
supplies in cash

25
Prepaid Expense – Supplies (Expense Method)

LCUP bought supplies from National Book Store for P1,000

cash on Jan. 1 2009. He used P600 throughout the year.
Adjusting Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Supplies Inventory 400

Supplies Expense
To adjust for supplies 400
expense

26
 Unearned Income/ Revenue

▪Deferred Income
▪Cash is collected but
not yet earned
Two Methods of Recording
Unearned Income/ Revenue

Liability Income
Method Method
Liability Method

▪Recognizes the
liability as credit in
the journal entry
 Business Transaction Review
▪ On September 1, 2016, Etude House
paid P4,500 for six month rent in SM
Mega Mall.
▪ On September 1, 2016, SM Mega
Mall received advance payment
amounting to P4,500 for six months
rent from Etude House.
 Unearned Income (Liability Method)
On September 1, 2016, SM Mega Mall received
advance payment amounting to P4,500 for six
months rent from Etude House.
SM Mega Mall Journal Entry
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Sept.1 Cash 4,500

Unearned Rent Income 4,500
To record for collected
advance payment of rent
31
 Unearned Income (Liability Method)
On September 1, 2016, SM Mega Mall received
advance payment amounting to P4,500 for six
months rent from Etude House.
SM Mega Mall Adjusting Entry
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Dec. 31 Unearned Rent Income 3,000

Rent Income 3,000
To adjust for unearned
rent income
32
 Income Method

▪Recognizes the
income as credit in
the journal entry
Unearned Income (Income Method)
On September 1, 2016, SM Mega Mall received
advance payment amounting to P4,500 for six
months rent from Etude House.
SM Mega Mall Journal Entry
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Sept.1 Cash 4,500

Rent Income
To record for rent 4,500
income collected in cash
34
 Unearned Income (Income Method)
On September 1, 2016, SM Mega Mall received
advance payment amounting to P4,500 for six
months rent from Etude House.
SM Mega Adjusting Entry
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Dec 31 Rent Income 1,500

Unearned Rent Income 1,500
To adjust for rent
income
35
▪ On December 1, 2007, Mercury Drug Store paid
P3,000 for a three-month rent starting December
1 to Robinsons Mall.
▪ Prepare journal and adjusting entry.
▪ Mercury Drug Store – ASSET and EXPENSE
method
▪ Robinsons Mall – LIABILITY and INCOME method
 Mercury Drug Store
Asset & Expense Method
 Prepaid Expense – Rent (Asset Method)
On December 1, 2007, Mercury Drug Store
paid P3,000 for a three-month rent starting
December 1 to Robinsons Mall.
Journal Entry
GENERAL JOURNAL
. DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec. 1 Prepaid Rent 3,000

Cash
To record advance 3,000
payment for three-month rent

38
Prepaid Expense – Rent (Asset Method)
On December 1, 2007, Mercury Drug Store
paid P3,000 for a three-month rent starting
December 1 to Robinsons Mall.
Adjusting Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Rent Expense 1,000

Prepaid Rent 1,000
To adjust for prepaid rent

39
Prepaid Expense-Rent (Expense Method)
On December 1, 2007, Mercury Drug Store paid
P3,000 for a three-month rent starting December 1
to Robinsons Mall.
Mercury Drug Journal Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Etude House Journal Entry3,000

Dec. 1 Rent Expense
Cash
To record payment for 3,000
rent for 3 months

40
 Rent (Expense Method)
On December 1, 2007, Mercury Drug Store paid
P3,000 for a three-month rent starting December
1 to Robinsons Mall.
Mercury Drug Adjusting Entry
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Dec. 31Prepaid Rent 2,000

Rent Expense 2,000
To adjust for rent
expense
41
 Robinsons Mall
Liability & Income Method
 Unearned Income (Liability Method)
On December 1, 2007, Robinsons Mall received
P3,000 for a three-month rent starting December
1 from Mercury Drug Store
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Dec. 1 Cash 3,000

Unearned To
Rent Income
record for advance 3,000
payment of rent collected from
Mercury
43
 Unearned Income (Liability Method)
On December 1, 2007, Robinsons Mall
received P3,000 for a three-month rent starting
December 1 from Mercury Drug Store
Adjusting Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec. 31 Unearned Rent Income 1,000

Rent Income 1,000
To adjust for unearned
rent income
44
 Unearned Income (Income Method)
On December 1, 2007, Robinsons Mall received
P3,000 for a three-month rent starting December
1 from Mercury Drug Store
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Dec. 1 Cash 3,000

Rent Income
To record for advance 3,000
payment of rent collected from
Mercury
45
 Unearned Income (Liability Method)
On December 1, 2007, Robinsons Mall
received P3,000 for a three-month rent starting
December 1 from Mercury Drug Store
Adjusting Entry
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec. 31 Rent Income 2,000

Unearned Rent Income 2,000
To adjust for rent income
46
Amount need to be used for Adjusting Entries
▪ Prepaid Expenses
▪ ASSET Method – amount used
▪ EXPENSE Method- amount left
▪ Unearned Income/Revenue
▪ LIABILITY Method- amount earned
▪ Income Method- amount left to be earned
in the future
CONTINUATIO
N
▪How does an asset
become obsolete or
inadequate?
 Depreciation Expense
▪Gradual and permanent decrease
in value of fixed assets.
▪Equipment, building, furniture &
fixtures and improvements
▪Estimated
Factors to be considered in determining
depreciation:

▪1. Cost of the asset (including

incidental cost)
▪2. Scrap/Salvage/Disposal
Value
▪3. Useful life
 Depreciation Expense

▪ Annual Depreciation = Cost – Salvage Value

▪ Useful Life (Years)
 Depreciation Expense - Equipment

▪ Argem Law Office purchased an

office computer amounting to
P35,000 cash on April 1, 2016. It was
estimated that the computer’s
salvage value after its useful life of
five years will be worth P5,000.
 Depreciation Expense
▪ Annual Depreciation = P35,000 – P5,000
▪ 5 years
= 6,000
6,000/12 = 500
500 x 9 = 4,500
 Accumulated Depreciation
▪Contra asset account that shows
the cumulative sum of all
depreciation expense from the
acquisition date of the asset until
the current period.
 Depreciation - Equipment
▪ Depreciation Expense on December 31, 2016
▪ 6,000 x 9/12 = P4,500
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Depreciation Expense 4, 500

Accumulated Depreciation – Office Equipment
To provide depreciation
4,500
for office equipment
57
 Depreciation - Building
▪ The building was newly constructed on March 1,
2007 with a cost of P100,000 , useful life of 10 years
and scrap value of P10,000
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Depreciation Expense- Building 7, 500

Accumulated Deprn. – Building 7,500
To provide depreciation
for building
58
 Depreciation – Furniture and Fixtures
▪ The furniture and fixtures were acquired on
January 1,2007 amounting to P30,000 with a
useful life of five years and scrap value of P3,000
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Depreciation Expense-Furn. &Fix. 5, 400

Accumulated Deprn. – Furn. & Fix. 5,400
To provide depreciation
for furniture and fixtures
59
 Accrued Income
▪ Revenue item that have not been
collected, but was earned during
the accounting period covered
▪ Examples: interest, referral or
commission and utilities
 Accrued Income - Referral
▪ Healthway Clinic referred a patient for laboratory
examination to Makati Diagnostic Laboratory for which
it is entitled to a commission of P500. This amount was
not yet collected as of December 31
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Referral Fee Receivable 500

Referral Fee Income 500
To adjust for referrals due
from Makati Diagnostic Lab.
61
 Accrued Income - Interest
▪ Martina asked her secretary to show a
promissory note dated July 1, 2016 issued
by Beni Santos amounting to P10,000
with 10% interest payable in one year.

▪ I = Principal X Interest Rate X Time

 Accrued Income - Interest
Martina asked her secretary to show a promissory note dated
July 1, 2016 issued by Beni Santos amounting to P10,000 with
10% interest payable in one year.
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Interest Receivable 500

Interest Income 500
To record adjusting entry
for interest earned
63
 Accrued Income - Interest
▪ RP Finance received a 45-day 18% note for a
P100,000 cash loan provided for Healthway Clinic.
The note is dated on December 1, 2007.
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Interest Receivable 1,500

Interest Income
To accrue interest for 30 1,500
days due fr. Healthway Clinic
64
 Accrued Expenses
▪Goods and/or services that are
received and/or used but not yet
paid for.
▪Examples of Accrued Expenses:
interest, utilities, salaries and
wages
 Accrued Expense - Interest
▪ Healthway Clinic issued a 45-day, 18% note for a
P100,000 cash loan extended by RP Finance . The
note is dated on December 1, 2007.
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Interest Expense 1,500

Interest Payable
To accrue interest for 30 1,500
days due to RP Finance
66
 Accrued Expense - Salaries
▪ Luna was informed by the master cutter that the shop has
unpaid salaries of the one of dressmakers who rendered
overtime during the Christmas holiday rush amounting to
P5,000.
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Salaries Expense 5,000

Salaries Payable 5,000
To adjust for unpaid
overtime salaries of dressmakers.
67
 Accrued Expense - Utilities
▪ On February 29, 2016, Matapang received the electric bill for
the month of November amounting to PHP3,800which was
not paid as of December 31
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Utilities Expense 3,800

Utilities Payable 3,800
To adjust for the utilities
for the month of November
68
▪Meron ka na bang
pautang na hindi mo
na nasingil?
Accounts Receivable

▪Collectible by a firm
▪Claims that are expected
to be collected in cash
 Bad Debts
▪Uncollectible accounts that
are considered normal and
should be recognized as
one of the company’s
operating expenses
Two Methods of Recognizing
Bad Debts

Direct Write Allowance

Off Method Method
 Direct Write Off Method
▪Recognizes bad debts only
when it is certain that the
company will not be able to
collect the account anymore.
 Direct Write Off Method
▪ Winner company writes off Rose Trading Company’s P8,000
balance as uncollectible on December 31 when the company
declared bankruptcy.
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Doubtful Accounts Expense 8,000

Accounts Receivable 8,000
To record write off of
uncollectible accounts of RTC.

74
What if Rose Trading Company paid partially (P5,000) its
outstanding liability on Jan 10?

▪ Winner company writes off Rose Trading Company’s

P8,000 balance as uncollectible on December 31
when the company declared bankruptcy.
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Jan 10 Cash 5,000

Doubtful
To record partially
Accounts Expense 5,000
recovery of written off account.

75
 Allowance Method
▪In allowance method, the
doubtful debts are estimated
and bad debts expense is
recognized before the debts
actually become uncollectible.
Allowance for Doubtful Accounts
▪Contra asset account that
takes into consideration the
percentage of the entity’s
accounts receivable which
may not be collected
 Allowance Method
▪ Winner company writes off Rose Trading Company’s
P8,000 balance as uncollectible on December 31 when
the company declared bankruptcy
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Doubtful Accounts Expense 8,000

Allow. for Doubtful Accounts 8,000
To adjust for estimated
doubtful accounts
78
What if receivables are collected on Jan 10?
▪ Winner company writes off Rose Trading
Company’s P8,000 balance as uncollectible on
December 31 when the company declared
bankruptcy
▪ GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Jan 10 Cash 8,000

Accounts Receivable 8,000
To record for collected
accounts receivable
79
What if receivables were confirmed uncollected?

▪ Winner company writes off Rose Trading Company’s

P8,000 balance as uncollectible on December 31 when
the company declared bankruptcy
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Jan 10 Allow.for Doubtful Accounts 8,000

Accounts Receivable 8,000
To adjust for estimated
doubtful accounts
80
Assumptions under Percentage
of Receivables Method

Increased by Increased to
Assumption Assumption
 Increased BY Assumption
▪ Argem Law Office has been rendering various legal and consultancy
services for the past ten years. It offers its services on cash and on
account. Allowance for doubtful accounts is to be increased by 10%.
The following are the unadjusted ledger balances of accounts
receivable and allowance for bad debts of the firm:

Accounts Receivable, December 31, 2016

(debit) P180,000
Allowance for bad debts (credit balance)
P5,500
 Increased BY Assumption
▪ Accounts Receivable, December 31 P180,000
▪ Estimated percentage of loss x 10%
▪ Bad Debts Expense, December 31 P 18,000
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec. 31 Doubtful Accounts Expense 18,000

Allow for Doubtful Accounts 18,000
To adjust for estimated
doubtful accounts
83
 Increased TO Assumption
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec 31 Doubtful Accounts Expense 12,500

Allow for Doubtful Accounts 12,500
To adjust for estimated
doubtful accounts for the year

84
▪LET’S PRACTICE! 
 Allowance for Bad Debts
▪ The following information are available from the unadjusted
December 31 trial balance of Mikey Company. The company
estimated that 10% of the outstanding customer’s account will
be doubtful of collection.

Accounts Receivable (debit balance)

P300,000
Allowance for bad debts (credit balance)
P20,000
 Increased BY Assumption
▪ Accounts Receivable, December 31 P300,000
▪ Estimated percentage of loss x 10%
▪ Bad Debts Expense, December 31 P 30,000
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec. 31 Doubtful Accounts Expense 30,000

Allow. for Doubtful Accounts 30,000
To adjust for estimated
doubtful accounts
87
 Increased TO Assumption
▪ Adjusting Entry:
GENERAL JOURNAL
DATE ACCOUNT TITLES & EXPLANATION F DEBIT CREDIT

Dec. 31 Doubtful Accounts Expense 10,000

Allow. for Doubtful Accounts 10,000
To adjust for estimated
doubtful accounts for the year

88
SUMMARY:
Adjusting the Books

Types of Adjusting Entries

Important Accounting Principles 1. Depreciation expense
1. Time Period 2. Deferred expenses or prepaid expenses
3. Deferred Income or unearned income
2. Accrual 4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets
3. Matching 6. Allowance for Bad Debts