chapter 6 - adjusting entries
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7/28/2019 CHAPTER 6 - Adjusting Entries
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ADJUSTING ENTRIES
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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
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ContinuedTHUS
PROFIT = Revenue earned – Expenses incurred
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Continued Types of adjusting entries
Adjusting entries
Expenses Revenues
Accrued Prepaid Accrued Prepaid
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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
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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
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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
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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
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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
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ILLUSTRATION 1- ACCRUED EXPENSES Answer:
Journal entry:31/12/2008 Dr Salaries & Wages RM10,000
Cr Accrued Salaries RM10,000
& Wages
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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
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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
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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
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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
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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
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ILLUSTRATION 2- Prepaid Expenses
Extract Income Statement:
Income Statement for the year ended 31/12/2008(RM)
Gross profit XXXX
Less: ExpensesRent 19,700
Extract Balance Sheet:
Balance Sheet as at 31/12/2008 (RM)
Current Asset
Prepaid Rent 300
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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
Journal entry at the end of accounting period
Debit Accrued revenue a/c
Credit Revenue a/c
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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
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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
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ILLUSTRATION 3- Accrued Revenues
Extract Income Statement:
Income Statement for the year ended 31/12/2008(RM)
Gross profit XXXX
Add: RevenuesCommission Received 5,000
Extract Balance Sheet:
Balance Sheet as at 31/12/2008 (RM)
Current Asset
Accrued Commission Received 5000
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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
Journal entry at the end of accounting period
Debit Revenue a/c
Credit Prepaid revenue a/c
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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
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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
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ILLUSTRATION 4- Prepaid Revenues
Extract Income Statement:
Income Statement for the year ended 31/12/2008(RM)
Gross profit XXXX
Add: RevenuesRent Revenue 10,000
Extract Balance Sheet:
Balance Sheet as at 31/12/2008 (RM)
Current Liabilities
Prepaid Rent Revenue 2,000