CHAPTER 6 - Adjusting Entries

7/28/2019 CHAPTER 6 - Adjusting Entries

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ADJUSTING ENTRIES



Adjusting entries Adjusting entries are general journal entries made

at the end of an accounting period in order to

determine correctly the revenues earned and theexpenses incurred for an accounting period

In this way, a more accurate profit figure can be

obtained from the books of accounts

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ContinuedSale of goods or services

Revenue Expenses

Matched

Profit Loss

Creates Incurs

Revenue>Expenses Revenue<Expenses



ContinuedTHUS

PROFIT = Revenue earned – Expenses incurred



Continued Types of adjusting entries

Adjusting entries

Expenses Revenues

Accrued Prepaid Accrued Prepaid



ContinuedNeed to adjust (Expenses)

1. Some expense items that have been incurred but not yetpaid and therefore not recorded in the current period-accrued expenses

2. Some expense items that have been paid in advance andshould not appear in the current’s period account – prepaid expenses



ContinuedNeed to adjust (Revenue):

1. Some revenue items which are earned but not yetreceived and therefore not yet recorded in the currentperiod – accrued revenue

2. Some revenue items have been received and recorded asrevenue but not yet been earned for that period – prepaid revenue



ContinuedBased on the ACCRUAL CONCEPT

The accruals concept dictates that expenses arerecognized as they are incurred, not when the money is paid and revenues are recognized as they are earned,not when the money is received



Accrued expenses

These are expenses that have been incurred but not yetpaid and therefore must be recorded at the end of accounting period

Accrued expenses can be called as owing expenses,outstanding expenses or expenses in arrears

At the end of accounting period, such an expense willbe considered as a current liability in the balance sheet

Journal entry at the end of accounting periodDebit Expense a/c

Credit Accrued expense a/c



ILLUSTRATION 1- ACCRUED EXPENSES

In the financial year ending 31/12/2008, total

salaries and wages should be at RM30,000. Butaccording to the salaries and wages account, itshows that only RM20,000 have been paid. Makethe necessary journal entries and draw up the

salaries and wages account



ILLUSTRATION 1- ACCRUED EXPENSES Answer:

Journal entry:31/12/2008 Dr Salaries & Wages RM10,000

Cr Accrued Salaries RM10,000

& Wages



ILLUSTRATION 1- ACCRUED EXPENSES

Ledger Entry:

Salaries and wages account 31/12/08 Bank 20000 31/12/08 IS 30000

Accrued salaries 10000

and wages

30000 30000

Accrued salaries and wages account

31/12/08 Bal c/d 10000 31/12/08 Salaries & 10000

Wages

10000 10000



ILLUSTRATION 1- Accrued Expenses

Extract Income Statement:

Income Statement for the year ended 31/12/2008(RM)

Gross profit XXXX

Less: ExpensesSalaries and wages 30,000

Extract Balance Sheet:

Balance Sheet as at 31/12/2008 (RM)

Current Liabilities

Accrued Salaries and Wages 10,000



Prepaid expenses

Expenses which have been paid for in advance or not yetused up in the current period and therefore should notappear in the current period accounts

Also known as unexpired cost

The item shown as current asset in the balance sheet

Journal entry at the end of accounting period

Debit Prepaid expense a/c

Credit Expense a/c



ILLUSTRATION 2- PREPAID EXPENSES

On 31/12/08, the amount of rent of AAN Enterprise’s trialbalance was RM20,000. Out of this, RM300 was rent paidin advance.

Answer: Journal entry:

31/12/08 Dr. Prepaid Rental RM300

Cr. Rental RM300



ILLUSTRATION 2- PREPAID EXPENSESLedger Entry:

Rental account

31/12/08 Bank 20000 31/12/08 Prepaid Rental 300

Income

Statement 19700

20000 20000

Prepaid rental account

31/12/08 Rental 300 31/12/08 Bal. c/d 300

300 300



ILLUSTRATION 2- Prepaid Expenses



Gross profit XXXX

Less: ExpensesRent 19,700



Current Asset

Prepaid Rent 300



Accrued revenue

These are revenues which has been earned but not yetreceived in terms of payment

Such an amount will be considered as a current asset inthe balance sheet of the business at the end of accountingperiod


Debit Accrued revenue a/c

Credit Revenue a/c



ILLUSTRATION 3- Accrued Revenue

On 31/12/08, the commission earned by the business but not yet received amounted to RM 5,000.

Answer:

Journal entry:31/12/08 Dr. Accrued Commission ReceivedRM5000

Cr. Commission Received RM5000



ILLUSTRATION 3- Accrued revenue

Ledger Entry:Commission Received account

31/12/08 Income Statement 5000 31/12/08 Acc.Com.Rec. 5000

5000 5000

Accrued Commission Received account

31/12/08 Comm.Received 5000 31/12/08 Bal. c/d 5000

5000 5000



ILLUSTRATION 3- Accrued Revenues



Gross profit XXXX

Add: RevenuesCommission Received 5,000



Current Asset

Accrued Commission Received 5000



Prepaid revenue

Revenue which has been received in advance from acustomer but not yet been earned for that period.

Also called as unearned revenue, deferred revenue

Such an amount can be considered as current liability


Debit Revenue a/c

Credit Prepaid revenue a/c



ILLUSTRATION 4- Prepaid Revenue

Alya received 12 months rent revenue for RM12,000 startingfrom 1 March 2008 for accounting period ended 31/12/08.

Answer:

Only 10 months rent should be received/earned for the yearended 2008, another 2 months is prepaid rent revenue.

Journal entry:

31/12/08 Dr. Rent Revenue RM2000

Cr. Prepaid Rent Revenue RM2000



ILLUSTRATION 4- Prepaid revenue

Ledger Entry:Rent Revenue account

31/12/08 Prepaid Rent Rev. 2000 31/12/08 Bank 12000

Income Statement 10000

12000 12000

Prepaid Rent Revenue account

31/12/08 Bal. c/d 2000 31/12/08 Rent Revenue 2000

2000 2000



ILLUSTRATION 4- Prepaid Revenues



Gross profit XXXX

Add: RevenuesRent Revenue 10,000



Current Liabilities

Prepaid Rent Revenue 2,000

Documents

CHAPTER 6 - Adjusting Entries