Scribd
Upload
11 views49 pages

ACC2111 Adjusting Entries Week 4

This lecture covers adjusting entries in accounting, focusing on their necessity for accurate financial reporting and the different types of adjusting entries related to accruals and deferrals. Key financial statement assumptions are outlined, including the accounting entity, period, monetary, historical cost, going concern, and materiality assumptions. The lecture also provides examples of adjusting entries for prepaid expenses, accrued revenues, and unearned revenues, emphasizing their impact on financial statements.

Uploaded by

fuyunshen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
11 views49 pages

ACC2111 Adjusting Entries Week 4

This lecture covers adjusting entries in accounting, focusing on their necessity for accurate financial reporting and the different types of adjusting entries related to accruals and deferrals. Key financial statement assumptions are outlined, including the accounting entity, period, monetary, historical cost, going concern, and materiality assumptions. The lecture also provides examples of adjusting entries for prepaid expenses, accrued revenues, and unearned revenues, emphasizing their impact on financial statements.

Uploaded by

fuyunshen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 49

ACC2111: ACCOUNTING

PRINCIPLES

LECTURE 4:
ADJUSTING ENTRIES
Lecturer: Anisur Rahman
Email : arahman@ozford.edu.au
LECTURE OBJECTIVES

At the end of this lecture, you should be able to:


•Describe each of the financial statement
assumptions;
•Understand why adjusting entries occur;
•Identify the different types of adjusting
entries;
•Prepare adjusting entries as they relate to
accruals and deferrals of revenues and
expenses.
FINANCIAL STATEMENT ASSUMPTIONS

These are the concepts underlying the preparation


of financial statements:
(1) Accounting Entity Assumption
• Business is a separate accounting entity from its
owners
• ‘Accounting entity’ is not the same as ‘legal entity’
(2) Accounting Period Assumption
• Life of an entity sub-divided into accounting
periods
• Need to match revenue earned and expenses
incurred within this period
• A reason why we do adjusting entries
FINANCIAL STATEMENT ASSUMPTIONS

(3) Monetary Assumption


• Accounting transactions measured in Australian
dollars
• Transactions that cannot be given a dollar value
are not included in accounting records
• Reliable measurement
(4) Historical Cost Assumption
• Assets initially recognised at cost
• An objective and verifiable basis for transactions
measurement
• Reliable measurement
FINANCIAL STATEMENT ASSUMPTIONS

(5) Going Concern Assumption


• Entity assumed to continue indefinitely
• Complements the historical cost convention
• If no longer a going concern, entity must value
accounts at market/realisable value
(6) Materiality Assumption
• Small dollar value items are expensed rather
than included as an asset on the balance sheet
WHY ADJUSTING ENTRIES?

•Adjusting entries:
•Improve the measurement of financial
performance and financial position for an
accounting period
•Accounting period assumption

•Implement accrual accounting


•Do not exist under cash accounting
ACCRUAL VS. CASH ACCOUNTING

•Accrual accounting differs from cash accounting in


two respects:
 (1) Records credit transactions
•Revenue is recognised when earned (e.g., credit
sale)
•Expense is recognised when incurred (e.g.,
electricity bill)
•Neither transaction recognised under cash
accounting until cash flow

 (2) Records adjusting entries


•Do not exist under cash accounting
WHAT ADJUSTING ENTRIES?
•Adjusting entries comply with the double-
entry system:
•After each adjusting entry, the accounting
equation should balance
•For every DR there is a corresponding CR
•The sum of DR equals the sum of the CR

•Every adjusting entry affects both the income


statement and the balance sheet
•One entry will be a R or Ex (I/S) while other
entry is either an A or L (B/S)
ADJUSTING ENTRIES

 The purpose of adjusting entries is to assign


to each period appropriate amounts of
revenue & expense.
 Are needed at the end of each accounting
period to make certain that appropriate
amount of revenue and expense are reported
in the company’s income statement
ADJUSTING ENTRIES

Adjusting entries assign revenue to the


period in which they are earned, and
expenses to the periods in which related
goods or service are used.
Adjusting Entries are made at the end of
accounting period.
DEFERRALS AND ACCRUALS

Deferral
is the postponement of recognition of “an expense
already paid but not yet incurred”
or
“a revenue already collected but not yet earned”
DEFERRALS AND ACCRUALS

Deferrals
If the adjusting entries are not recorded:
For expense:
Assets will be more, and expenses will be less.
Net profit will be more, and equity will be more.
For revenue:
Liabilities will be more, and income will be less.
Net profit will be less, and equity will be less.
DEFERRALS AND ACCRUALS

Accrual
•is the recognition of an expense already
incurred but unpaid
or
•revenue earned but uncollected
DEFERRALS AND ACCRUALS

Accruals
If the adjusting entries are not recorded:
For expense:
Liability will be less, and expenses will be less.
Net profit will be more, and equity will be more.
For revenue:
Asset will be less, and income will be less.
Net profit will be less, and equity will be less.
FOUR TYPES OF ADJUSTING ENTRIES

 Converting Assets to Expenses or Expenses


to Asset.
 Converting Liabilities to Revenue or
Revenue to Liability
 Accruing Unpaid Expenses
 Accruing Uncollected Revenue
WHAT ADJUSTING ENTRIES?

Four main types of adjusting entries considered


today:
Accruals Deferrals

Accrued Unearned
Revenues revenues revenues
(an asset) (a liability)

Accrued
expenses Prepayments
Expenses
(a liability) (an asset)
PREPAYMENTS

•Expenditure in one accounting period that covers


a term extending into the next accounting period
•E.g., an insurance premium paid annually in
advance

•To the extent the expenditure provides future


economic benefits it should be carried forward as
an Asset in the balance sheet

•A prepayment can also be known as a prepaid


expense
Example:
Paid a 12-month insurance premium on 1/2/2023
for $1,200. Year ended on 30/6/2023

Insurance Expense

5 months 7 months

$500 $700
used not
used
TRANSACTION INITIALLY RECORDED
AS AN EXPENSE
General Journal
Initial Record
1/2/2023 Insurance Expense $1,200
Cash at Bank $1,200
Adjusting Entry
30/6/2023 Prepaid Insurance $700
Insurance Expense $700
TRANSACTION INITIALLY RECORDED
AS AN ASSET
General Journal
Initial Record
1/2/2023 Prepaid Insurance $1,200
Cash at Bank $1,200
Adjusting Entry
30/6/2023 Insurance Expense $500
Prepaid Insurance $700
STUDENT TASK

•Jo’s Hairdressing Salon paid $1800 on March 25,


2023 for a 12-month newspaper advertising
contract commencing on April 1, 2023
Required
•Complete the general journal entries (recording
the March 25 transaction as an expense)
•Complete general journal entries (recording the
March 25 transaction as an asset)
WORKINGS (AS AN EXPENSE)

General Journal

Date Particulars DR CR
WORKINGS (AS AN ASSET)

General Journal

Date Particulars DR CR
ACCRUED EXPENSES

•Expense incurred in the accounting period but at


balance day has not been paid or charged to
account

•Expense should be recognised in the period it is


incurred
•Liability also recognised (entity’s obligation for
payment)
•Also known as accruals
Example:
• Employees are paid monthly for a total of $20,000
• The business owes half a month’s wages at the end of
the accounting period

General Journal
Date Particulars DR CR
• If Expense is not adjusted, it will be understated by $10,000
• Has the $10,000 been incurred by the business?
• Expense account will need to be adjusted upward by
$10,000
• Expense Account (DR)
• Liability account created with a balance of $10,000 to reflect
the obligation to pay employees $10,000
• Liability Account (CR)
STUDENT TASK

•A business received its telephone account for


$900 on June 30, 2022
•It is due to be paid on July 30, 2022
Required
•Complete the general journal entry recording
the adjusting entry
WORKINGS

General Journal

Date Particulars DR CR
UNEARNED REVENUE

•Cash has been received but the earning process has


not yet been completed
•E.g., rental income that relates to a future period
•E.g., frequent flyer points sold prior to seat being
used

•To the extent it relates to goods or services yet to be


rendered, it should be recognised in the balance sheet
as Liability

•Also referred to as:


•Revenue received in advance
•Prepaid revenue
Transaction Initially Recorded as Revenue
Example:
Received 6 months' rent ($600) in advance on 1/5/22

General Journal

Date Particulars DR CR
• If Revenue is not adjusted it will be $600 for the year ended
30/6/22. Is this the amount earned for the period?

• Revenue should be adjusted downward by $400 as only


$200 earned
• Revenue (DR)

• Liability account is created with a balance of $400


• Liability (CR)
Transaction Initially Recorded as a Liability

General Journal

Date Particulars DR CR
• If Liability is not adjusted, it will be $600
• Is this the amount outstanding at 30/6/22?

• Liability account should be adjusted downward by $200 as only


$400 remains outstanding
• Liability (DR)

• Revenue account credited with $200 to reflect the rent earned


• Revenue (CR)
STUDENT TASK

•A business received $12,000 in advance on


1/3/2022 to build a swimming pool for a
customer
•The contract is for 6 months, and the work
occurs evenly across the months
Required
Complete the general journal entries (recording
the March 1 transaction as revenue)
Complete the general journal entries (recording
the March 1 transaction as a liability)
Workings (Initially Recorded as
Revenue)
General Journal

Date Particulars DR CR
Workings (Initially recorded as a
Liability)
General Journal

Date Particulars DR CR
ACCRUED REVENUE

•Revenue earned in the accounting period, but has


not been received or charged to account at the
end of the accounting period
•Revenue should be recognised in the period it
was earned
•Asset should also be recognised; entity’s right
to receive payment

•Also known as revenue receivable


Example:
• The business invested $30,000 in a 6-month term deposit
on 1/5/22 at 6% p.a. and end of the period is 30/6/22
• Interest is to be paid on redemption

General Journal

Date Particulars DR CR
•If not adjusted, Revenue will be understated by
$300
•Has the $300 been earned by the entity?

•Revenue should be adjusted upward by $300


• Revenue (CR)
•Asset account should be created with a balance
of $300 to reflect the right to receive payment
• Asset (DR)
LECTURE OUTCOMES

You should now be able to:


•Describe each of the financial statement
assumptions;
•Understand why adjusting entries occur;
•Identify the different types of adjusting entries;
•Prepare adjusting entries as they relate to
accruals and deferrals of revenues and
expenses; and
Additional Adjusting Entries
CONVERTING ASSET TO EXPENSE

August 5 Supplies amounting to $2,200 inclusive of GST were


purchased on credit.
Supplies Dr 2,000
GST Receivable Dr 200
Accounts Payable Cr 2,200
August 30 Supplies still in hand is $1,800.
31/8/2020
Supplies Expense Dr 200
Supplies Cr 200
CONVERTING ASSET TO EXPENSE

August 2: Insurance premium paid for 12 months to $2,640


inclusive of GST were purchased on credit.
Prepaid Insurance Dr 2,400
GST Receivable Dr 240
Accounts Payable Cr 2,640

August 31 2020
Insurance Expense Dr 200
Prepaid Insurance Cr 200
CONVERTING ASSET TO EXPENSE

August 2: Equipment purchased $24,000 plus GST.


The life of the asset is 5 years with a salvage value
of $3,000.

Depreciation = (24,000 – 3,000)/60 = 350

August 31 2020

Depreciation Expense Dr 350


Accumulated Depreciation- Equip Cr
350
CONVERTING LIABILITIES TO REVENUE

August 2 Commission $3,000 was received for 3


months and recorded as:
Cash at Bank Dr 3,000
Unearned Commission Cr 3,000

August 31 2020

Unearned Commission Dr 1,000


Commission Cr 1,000
ACCRUING UNPAID EXPENSES

Salaries Payable.
At 31st August, salaries expense of $300 has been
incurred by the company, but is not yet paid to
employees.

31/8/2020
Salaries Expense Dr 300
Salaries Payable Cr 300
ACCRUING UNEARNED REVENUE

On 12 August, a customer agreed to pay


$2,700 on 10 September for future
services over the next 30 days
31/8/2020
Accounts Receivable Dr 1,800
Service Revenue Cr 1,800
ACCRUING UNEARNED REVENUE

A business hold a note receivable of $10,000


from a customer due in 90 days. The note bears
an interest rate of 12% p. a. and was issued on
2nd August 2020. Use 360 days.

31/8/2020
Interest Receivable Dr 100
Interest Revenue Cr 100
ADDITIONAL HOMEWORK!

Record the following Adjusting Entries:


i.Depreciation on the motor vehicles is $3,000 per
annum;
ii.$900 of insurance has been consumed during the
month;
iii.Office stationery on hand as at June 30, 2022 was
costed at $350. (This is included in “General Office
Expenditure” );
iv.Wages of $900 are owed on June 30, 2020; and
v.Commission revenue owed to Melvin’s Magic Shop on
June 30, but not recorded, was $1,100.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy