11

Fundamentals of
Accountancy, Business
and Management 1

Quarter II – Module I
Preparing Adjusting Entries of a
Service Business

1
About the Module

This module was designed and written with you in mind. It is here to help you master
the different kinds or formats of transactions of a service business which will help
you in analyzing and preparing the journal entries. The scope of this module permits
it to be used in many different learning situations. The language used recognizes the
diverse vocabulary level of students. The lessons are arranged to follow the standard
sequence of the course. But the order in which you read them can be changed to
correspond with the textbook you are now using.

This module explains how to prepare adjusting journal entries which is part of the
accounting cycle of a service business.

After going through this module, you are expected to:

• Define adjusting journal entries and know its importance and;
prepare adjusting journal entries applicable to these transactions at the end of

What I Know (Pre-Test)

Instructions: Read and analyze each item. Write the letter of the correct answer.
1. Which of the following is NOT a step in the summarizing phase of the
accounting?
a. Analysis of the business transactions
b. Preparation of adjusting entries
c. Preparation of the adjusted trial balance
d. Preparation of closing entries
2. Which is NOT a type of adjusting entry?
a. Accrued Expenses
b. Prepaid Expenses
c. Unearned Expenses
d. Unearned Revenues
3. Which of the following entries is a proper adjusting entry?
a. Debit Cash and Credit Revenue
b. Debit Expense and Credit Payable
c. Debit Expense and Debit Payable
d. Debit Revenue and Credit Unearned Revenue
4. The trial balance is prepared from which accounting document?
a. Journal
b. Journal Voucher
c. Ledger
d. Ledger Voucher
5. The following steps in the accounting process are theoretically done
throughout the year, EXCEPT one. Which is it?

2
 a. Preparation of closing entries
b. Preparation of financial statement
c. Preparation of journal entries
d. Preparation of journal entries to close out expense accounts
6. Which of the following is never debited when making closing entries?
a. Expenses
b. Income Summary
c. Owner’s drawing
d. Revenue
7. Which of the following is true about the allowance for doubtful accounts?
a. It is always equal to the bad debts expense
b. It is never equal to the bad debts expense
c. It will always be less than the accounts receivable
d. It will never be less than the accounts receivable
8. Which of the following is an item in the income statement except one?
a. Accrues Payable
b. Expense
c. Revenues
d. All of the above
9. Which type of adjusting entry applies to cash received for revenues party
covering the current year for which financial statements are made in the
succeeding years?
a. Bad Debts c. Depreciation
b. Deferred Expense d. Unearned Revenue
10. Which of the following have a negative effect on the Owners Capital?
a. Depreciation c. Payment of liabilities
b. Drawings d. Salaries Expense
11. If a net income was recorded during the year, which of the following is
always true?
a. Assets increase c. Owners capital increase
b. Liabilities decrease d. None of these
12. Which of the following could result due to a net loss in operation?
a. Decrease in assets c. Increase in liabilities
b. Decrease in Owners Capital d. All of the above
13. Recording of depreciation expense causes a decreasing result in what
financial report.
a. Balance Sheet c. Income Statement
b. Cash Flow Statement d. Trial Balance
14. A decrease in assets means there was a net loss during the period.
a. Always true c. Rarely true
b. Never true d. Sometimes true
15. Which type of adjusting entry decreases total assets?
a. Accrued Expense c. Depreciation Expense
b. Bad Debts Expense d. Prepaid Expense

Lesson Preparing the Adjusting Journal

Entries
3
 What I Need to Know
At the end of this lesson, you are expected to:
• define adjusting journal entries and know their importance;
• prepare adjusting journal entries applicable to related transactions at the end of
the accounting cycle.

What’s In
This topic revolves on possibility of identifying what account or accounts
will be adjusted at the end of the accounting period. From posting the entries from
the journal to the ledger, and then computing the balance for each account before
preparing the trial balance. A trial balance does not guarantee the correctness of the
job done. There are things that needs to be adjusted at the end of the accounting
period.

Activity
Instructions: Determine the effects of the six types of adjusting entries on the
accounting equation by writing (I) for Increase, (D) for Decrease, and (N/E) for No
Effect.

ACCOUNTING EQUATION- ASSETS = LIABILITIES + EQUITY

1. Depreciation _______ __________ _________

2. Prepaid Expenses _______ __________ _________

3. Accrued Expense _______ __________ _________

4. Bad Debts Expense _______ __________ _________

5. Deferred Revenues _______ __________ _________

What’s New

Last time, you were able to learn on how to post journal entries to the ledger.
Then, you did compute the balances of each account by adding all the debit amounts
(if there are any) and likewise all the credit amounts (if there are any). Then you now
compute the balance ending of the account by deducting the total debit from the total
credit, or vice versa, depending on the nature of the account in order to get the ending
balance of that particular account. This applies to all accounts posted in the ledger.
But there are some accounts that need to be adjusted at the end of the
accounting period.

4
 The trial balance that you have prepared reflects the effects of the various
transactions entered into by the entity throughout the accounting period. However,
some of the amounts are not the final amounts that would be seen in the financial
statements. Thus, there is a need for adjustments.

What Is It

ADJUSTING ENTRIES

These are entries used to update the accounts prior to the preparations of
Financial Statements because they affect more than one accounting period.
Transactions are apportioned properly between the accounting period affected. The
accounts affected are adjusted so that there will be no overstatement or
understatement of balance sheet items and the income statement items.
The process of determining the entity’s net income or net loss requires certain
income and expense accounts to be apportioned over several accounting periods.
According to the accrual principle, income is recognized at the time it is actually
earned and expense is recognized at the time it is actually incurred or used.
Thus, a receipt of cash does not necessarily mean a recognition of income, and
payment of cash does not necessarily mean a recognition of an expense.

Types of Adjusting Entries

a. Prepayments
- These are expenses that are already paid but not yet incurred or used.
Following are the accounts subjected to adjustments.
Asset Method:
Journal Entry upon payment of purchase

Prepaid Expense P xxx

Cash P xxx
#

Adjusting entry at the end of the accounting period

Expense P xxx
Prepaid Expense P xxx
#
Note: The amount on the adjusting journal entry represents the expired or
used portion of the prepayment.

Example: On April 30, 2016, Javellana Co. paid P 15,000 worth of insurance
premium for two years. Give the adjusting entry on June 30, 2016.

Journal entry upon payment on April 30, 2016:

Prepaid Insurance P 15,000
Cash P 15,000
Paid 2 years insurance.

5
 Adjusting entry at the end of the accounting period June 30, 2016.
Insurance Expense P 1,250
Prepaid Expense P 1,250
To record the expired insurance.
Computation:
The P 15,000 insurance premium represents two years insurance.
Divide P 15,000 by 24 to get the monthly premium. Then. Multiply by 2 months that
represents the premium from May 1 to June 30, 2016.

P 15,000
----------- x 2 months = P 1,250.00 (this is the expired insurance amount)
24

b. Deferrals
- Unearned or deferred income is income already received but not yet
earned.
Liability Method:
Journal entry upon receipt of cash:
Cash P xxx
Unearned Income P xxx
Received cash for service rendered.

Adjusting journal entry at the end of the accounting period.

Unearned revenue P xxx
Income P xxx
Record earned portion of the liability.

Note: the amount of the adjusting journal entry is the earned portion of the
amount initially received.
Example:
On August 1, Dr. Uy received P 60,000 for Dental Fees to be rendered in the
next 5 months. Give the adjusting entry at the end of Sept. 30.
Journal entry upon receipt of CASH on August 1
Cash P 60,000
Unearned Dental Fee P 60,000
Received cash for dental services to be rendered.

Adjusting entry on September 30

Unearned Dental Fee P 20,000
Dental fee P 20,000
Record dental fee earned.

Computation:
The P 60,000 amount of cash receive represents 6 months dental
services to be rendered. Divide P 60,000 by 6 months to get the monthly dental fee
then multiply by 2 to get the result.
P 60,000
----------------------- x 2 months = P 20,000
6 months

6
 c. Accrued Expense
- These are expenses already incurred or used but not yet paid.

Adjusting entry at the end of the accounting period.

Expenses P xxx
Expenses Payable P xxx
Record unpaid expenses.
Example:
The company received a Maynilad bill in the amount of P 8,500 on
December 26, 2017. The company intends to pay on January 8, 2018.

Adjusting journal entry on December 31, 2017:

Utilities Expense P 8,500
Utilities Payable P 8,500
Record unpaid utilities for the month.

Explanation: this is a liability on the part of the company because this is

intended for the month of December but the company has not yet paid for it. Hence,
a liability on the part of the company should be recognized at the end of the
accounting period.
d. Accrued Income
- This is an income already earned but not yet received.

Example:
A one-year, 6% notes receivable in the amount of P 200,000 was
received on January 1, 2016. The interest and the principal are payable on
maturity date. Give the adjusting journal entry on June 30, 2016.

Adjusting journal entry on June 30, 2016

Interest Receivable P 6,000
Interest Income P 6,000
Record interest income earned.

Computation:
Interest = Principal x Rate x Time
= P 200,000 x 6% x ½ year
= P 200,000 x 0.06 x½
= P 6,000 ( this is the interest for 6 months )

e. Bad Debts / Doubtful Accounts / Uncollectible Accounts

- These are losses due to uncollectible accounts.
-
Adjusting entry at the end of the accounting period.

Bad Debts Expense P xxx

Allowance for Bad Debts P xxx
Record estimated uncollectible accounts.

Or

7
 Doubtful Accounts Expense P xxx
Allowance for Doubtful Accounts P xxx
Record estimated uncollectible accounts.

Or
Uncollectible Accounts Expense P xxx
Allowance for uncollectible Accounts P xxx
Record estimated uncollectible accounts.

Example:
Accounts Receivable shows a balance of P 100,000. It is estimated that 8%
of this is uncollectible. Give the adjusting journal entry on December 31,
2016for the provision of the estimated uncollectible accounts.
Bad debts Expense P 8,000
Allowance for Bad Debts P 8,000
Record estimated uncollectible accounts.
Computation:
P 100,000 x 0.08 = P 8,000

f. Depreciation Expense
- Is the allocation of plant asset cost over its estimated useful life. This
is the expense allotted for the wear and tear of property, plant and
equipment due to passage of time.

The following are the 3 factors considered in computing the depreciation

expense.
a. Cost is the purchase price of the depreciable asset
b. Salvage value is the estimated value of the asset at the end of its
useful life
c. Estimated useful life, as the name connotes, is not n exact
measurement but merely an estimation of the number of years an
asset can be useful to the entity.

Formula for computing for annual depreciation is as follows:

Cost P xxx
Less: Salvage Value xxx
-------
Depreciable Cost P xxx
Divided by: estimated useful life xxx
-------
Annual Depreciation P xxx
=====
The process of recording depreciation expenses does not directly charge
depreciation to the asset account. The charge is recorded in a contra-asset
account called Accumulated depreciation. the use of this account allows the
original cost of the asset and the related accumulated depreciation account to
be shown in the balance sheet. The balance of the accumulated depreciation
is deducted from the cost of the asset to get the carrying value of the asset.

8
 Example:
A building with an estimated useful life of 30 years finished
construction on June 1, 2016. The cost of the building is P 4,800,000.00 with
an estimated salvage value of P 300,000.
Give the adjusting entry on December 31, 2016 to record the
depreciation of the building.

Adjusting journal entry on December 31, 2016:

Depreciation Expense P 87,500
Accumulated Depreciation P 87,500
Record depreciation expense of the building.

Computation:
Cost P 4,800,000
Less : Salvage Value P 300,000
----------------------
Depreciation Cost P 4,500,000
Divided by estimated
Useful life 30 years
-----------------------
Annual Depreciation P 150,000
===============

Annual Depreciation P 150,000

---------------------- x 7 months = P 87,500.00
12 months

What’s More

Activity : Prepare Adjusting Entries

Instructions: From the Trial Balance of Aduyan’s Car Repair Shop below, you are
going to prepare the adjusting entries. Please see examples above. Show your
computation below your entry.

Adjustments:
a. Half of the Office Supplies account has already been consumed and charged
to expense. (Prepayments – Office Supplies Expense)
b. The Accounts Receivable balance estimates that 10% of it is uncollectible.
c. Fixed Asset account (Equipment) was not computed its monthly depreciation.
no salvage value given and the amount in the trial balance is the actual cost
purchased. It was purchased January 2, 2020 and estimated life is 5 years.
Compute depreciation Jan-Mar. 2020.

TRIAL BALANCE
ANDUYAN’S CAR REPAIR SHOP
FOR THE MONTH OF MARCH 2020

ACCOUNTS DEBIT CREDIT

9
Cash P 30,000
Accounts Receivable 12,000
Prepaid Office Supplies 2,000
Materials 6,000
Equipment 25,000
Cash Advance 1,000
Accounts Payable P 17,000
Capital 50,000
Drawings 5,000
Service Revenue 47,000
Salaries Expense 21,000
Rent Expense 5,000
Telephone Expense 2,500
Water Expense 1,500
Electricity Expense 3,000

TOTALS P 114,000 P 114,000

Answer here:
Adjusting entries:
Debit Credit
a.

Computation:

b.

Computation:

c.

Computation:

Prepare the Adjusted Trial Balance:

Post the adjustments in the adjustments column.
ADJUSTED TRIAL BALANCE
ANDUYAN’S CAR REPAIR SHOP
FOR THE MONTH OF MARCH 2020

10
 ADJUSTMENTS ADJUSTED TRIAL BALANCE
ACCOUNTS DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash P 30,000 P 30,000
Accounts Receivable 12,000 12,000
Prepaid Office Supplies 2,000 2,000
Materials 6,000 6,000
Equipment 25,000 25,000
Cash Advance 1,000 1,000
Accounts Payable P 17,000 P 17,000
Capital 50,000 50,000
Drawings 5,000 5,000
Service Revenue 47,000 47,000
Salaries Expense 21,000 21,000
Rent Expense 5,000 5,000
Telephone Expense 2,500 2,500
Water Expense 1,500 1,500
Electricity Expense 3,000 3,000

a.

b.

c.

TOTALS P 114,000 P 114,000 P P P P

What I Need to Remember

Adjusting Entries:
- These are entries used to update the accounts prior to the
preparations of Financial Statements because they affect more than
one accounting period.

Types of adjusting entries:

• Prepayments
- Expenses that are already paid but not yet incurred or used.
-
• Deferrals
- These are income that were already received but not yet earned.
-
• Accrued Expenses
- These are expenses that were already incurred or used but not yet
- paid.

• Accrued Income
- These are income already earned but not yet received.

• Bad Debts / Doubtful Accounts

- These are losses due to uncollectible accounts.

• Depreciation Expense
- These are allocation of plant asset cost over its estimated useful life.
This is the expenses allotted for the wear and tear property, plant and
equipment due to passage of time.

11
 What I Can Do
Activity – Adjusting Entries
Instructions: Prepare the adjusting entries of these transactions. Show your
solutions below the explanation.

a. Prepayments
On Sept. 1, 2017, Javellana Co., paid a one-year advance rent for P 15,000.
Give the adjusting journal entry on Dec. 31, 2017.

Entry upon payment on September 1, 2017

Particulars Debit Credit
P
P

Adjusting journal entry on December 31, 2017

Particulars Debit Credit
P
P

b. Deferrals
On November 1, 2017, Javellana Co., P 48,000 amount of advanced rentals
for 6 months. Give the adjusting journal entry on December 31, 2017.

Journal entry upon receipt of cash on November 1, 2017.

Particulars Debit Credit
P
P

Adjusting journal entry on December 31, 2017

Particulars Debit Credit
P
P

c. Accrued Expenses
On December 31, 2017, Javellana Co., has unpaid salaries amounted to P
15,000

Adjusting journal entry on December 31, 2017

Particulars Debit Credit
P
P

d. Accrued Income

12
 A one year, 5% note receivable in the amount of P 100,000 was received July
1, 2017. The interest and the principal are payable on the maturity date. Give
the Adjusting journal entry on December 31, 2017.

Adjusting journal entry on December 31, 2017

Particulars Debit Credit
P
P

Computation:

e. Bad Debts / Doubtful Accounts / Uncollectible Accounts

The Accounts Receivable of Javellana Co., shows a balance of P 50,000. It is
estimated that 5% is uncollectible. Give the adjusting journal entry on
December 31, 2017 for the provision of the uncollectible accounts.

Adjusting journal entry on December 31, 2017

Particulars Debit Credit
P
P

f. Depreciation Expense
A building with an estimated useful life of 10 years finished
construction on June 1, 2015. The cost of the building is P 1,500,000.00 with
an estimated salvage value of P 100,000.
Give the adjusting entry on December 31, 2015 to record the
depreciation of the building.
Particulars Debit Credit
P
P

Computation:

13
 Assessment (Post-Test)

Instructions: Read and analyze each item. Circle the letter of the best answer.
1. Which of the following have a negative effect on the Owners Capital?
a. Depreciation c. Payment of liabilities
b. Drawings d. Salaries Expense
2. If a net income was recorded during the year, which of the following is
always true?
a. Assets increase c. Owners capital increase
b. Liabilities decrease d. None of these
3. Which of the following could result due to a net loss in operation?
a. Decrease in assets c. Increase in liabilities
b. Decrease in Owners Capital d. All of the above
4. Recording of depreciation expense causes a decreasing result in what
financial report.
a. Balance Sheet c. Income Statement
b. Cash Flow Statement d. Trial Balance
5. A decrease in assets means there was a net loss during the period.
a. Always true c. Rarely true
b. Never true d. Sometimes true
6. Which type of adjusting entry decreases total assets?
a. Accrued Expense c. Depreciation Expense
b. Bad Debts Expense d. Prepaid Expense
7. Which of the following is NOT a step in the summarizing phase of the
accounting?
a. Analysis of the business transactions
b. Preparation of adjusting entries
c. Preparation of the adjusted trial balance
d. Preparation of closing entries
8. Which is NOT a type of adjusting entry?
a. Accrued Expenses
b. Prepaid Expenses
c. Unearned Expenses
d. Unearned Revenues
9. Which of the following entries is a proper adjusting entry?
a. Debit Cash and Credit Revenue
b. Debit Expense and Credit Payable
c. Debit Expense and Debit Payable
d. Debit Revenue and Credit Unearned Revenue
10. The trial balance is prepared from which accounting document?
a. Journal
b. Journal Voucher
c. Ledger
d. Ledger Voucher
11. The following steps in the accounting process are theoretically done
throughout the year, EXCEPT one. Which is it?
a. Preparation of closing entries
b. Preparation of financial statement

14
 c. Preparation of journal entries
d. Preparation of journal entries to close out expense accounts
12. Which of the following is never debited when making closing entries?
a. Expenses
b. Income Summary
c. Owner’s drawing
d. Revenue
13. Which of the following is true about the allowance for doubtful accounts?
a. It is always equal to the bad debts expense
b. It is never equal to the bad debts expense
c. It will always be less than the accounts receivable
d. It will never be less than the accounts receivable
14. Which of the following is an item in the income statement except one?
a. Accrues Payable
b. Expense
c. Revenues
d. All of the above
15. Which type of adjusting entry applies to cash received for revenues party
covering the current year for which financial statements are made in the
succeeding years?
c. Bad Debts c. Depreciation
d. Deferred Expense d. Unearned Revenue

15
References
Text Book
Commission on Higher Education K to 12 Transition Program Management Unit.
“Fundamentals of Accountancy Business, and Management Teaching Guide for
Senior High School”. 4th Floor, Commission on Higher Education, C.P. Garcia Ave.,
Diliman, Quezon City., 2016

Flocer Lao Ong, Fundamentals of Accountancy, Business & Management 1

“Enhanced Teacher’s Manual”. 839 EDSA, South Triangle, Quezon City; C&E
Publishing, Inc. 2017

Joselito G. Florendo, Fundamentals of Accountancy, Business & management

1, 856 Nicanor Reyes St., Manila, Phils. Rex Book Store, 2016

Florenz C. Tugas et.al. Fundamentals of Accountancy, Business and Management 1

“Introduction to Accounting”. Quezon City: Vibal Group Inc., 2016

Congratulations!
You are now ready for the next module. Always remember the following:

1. Make sure every answer sheet has your

▪ Name
▪ Grade and Section
▪ Title of the Activity or Activity No.
2. Follow the date of submission of answer sheets as agreed with your
teacher.
3. Keep the modules with you AND return them at the end of the school year
or whenever face-to-face interaction is permitted.

19