Adjustment Entries: Accrued and Prepaid Expenses/Revenues, Slides of Principles of Accounting

Download Adjustment Entries: Accrued and Prepaid Expenses/Revenues and more Slides Principles of Accounting in PDF only on Docsity!

Slide

Chapter 5

Adjustment Entry

Slide

Chapter 28 – Business Accounting 1, Frank Wood, 2016

Reading Material

Slide

Overview of Accounting Process

Slide

Accrual-Basis Accounting

Transactions recorded in the periods in which the

events occur.

Revenues are recognized when earned, rather than

when cash is received.

Expenses are recognized when incurred, rather than

when paid.

Accrual- vs. Cash-Basis Accounting

SO 1 Explain the accrual basis of accounting.

Timing Issues

Slide

Revenue Recognition Principle

Recognizing Revenues and Expenses

SO 1 Explain the accrual basis of accounting.

Companies recognize

revenue in the accounting

period in which it is earned.

In a service enterprise,

revenue is considered to be

earned at the time the service

is performed.

Timing Issues

Slide

Expense Recognition Principle – (Matching Principle)

Recognizing Revenues and Expenses

SO 1 Explain the accrual basis of accounting.

Match expenses with

revenues in the period when

the company makes efforts to

generate those revenues.

“Let the expenses follow

the revenues.”

Timing Issues

Slide

Revenues - recorded in the period in which they are

earned.

Expenses - recognized in the period in which they

are incurred.

Adjustment entries - needed to ensure that the

revenue recognition and expense recognition are

followed.

SO 2 Explain the reasons for adjusting entries.

The basics of adjustment entries

Slide

1. Prepaid Expenses.

Expenses paid in cash and

recorded as assets before

they are used or consumed.

Deferrals

3. Accrued Revenues.

Revenues earned but not yet

received in cash or recorded.

4. Accrued Expenses.

Expenses incurred but not

yet paid in cash or recorded.

2. Deferred Revenues.

Revenues received in cash

and recorded as liabilities

before they are earned.

Accruals

SO 3 Identify the major types of adjustment entries.

Types of adjustment entries

Slide

Accounting for Accrued Expense

Example: X Company rented a store with rent of £ 4 , 000 per year. Rent

is payable at the end of every three months. The rent was paid on time in

March, but this is not always the case.

What is the rent expense for the year ended 31 December 20X0? £4,

How much is paid for the year ended 31 December 20X0?

How much is owing as at 31 December 20X0? £1,

=> Accrued Expense as at 31 December 20X0 £1,

Step 1: Analyze transactions

Amount Rent due Rent paid (by cheque)

£1,000 31 March 20X0 31 March 20X

£1,000 30 June 20X0 2 July 20X

£1,000 30 September 20X0 4 October 20X

£1,000 31 December 20X0 5 January 20X

Slide

Accounting for Accrued Expense

Step 2: Journalize

Principle:

1. During the current period: when rent is paid, treat it as expense

2. At the end of the current period: record accrued expense

3. At the end of the current period: transfer expenses to Profit and Loss

account

4. At the beginning of the next period: reverse accrued expense

Slide

Accounting for Accrued Expense

Step 3: Post to Ledger account

20 X 0

Mar 31 Cash at bank 1 , 000

Jul 2 Cash at bank 1 , 000

Oct 4 Cash at bank 1 , 000

Dec 31 Accrued expense 1 , 000 Dec 31 Profit and Loss 4 , 000

4 , 000 4 , 000

20 X 1

Jan 1 Accrued expense 1 , 000

Rent Expense

20 X 0 20 X 0

Dec 31 Balance c/d 1 , 000 Dec 31 Rent expense 1 , 000

20 X 1

Jan 1

Rent expense

(accrual reversed) 1 , 000 Jan 1 Balance b/d 1 , 000

Accrued Expense

A credit balance brought down on

Accrued Rent account

Slide

Prepaid Expense

Rent

Business rates

Supplies

Prepaid expenses often occur in regard to:

Motor expense

Depreciation

If the business pay in this period for something which relates to the next

reporting period, we use the prepayment principle to transfer that expense

forward to the next period.

Accounting principle for Prepaid Expense

Type DR CR Description

Prepaid Expense Asset

(prepayment)

(Reduction

in) expense

Expense paid/recorded in

period, not incurred until

next period

• Benefit paid for but not used up
• Treated as an asset
• Also called “prepayment” or “amounts paid in advance”

BEFORE

Expense recorded Cash Payment

Slide

Accounting for Prepaid Expense

Step 2: Journalize

Principle:

1. During the current period: when rent is paid, treat it as expense

2. At the end of the current period: record prepaid expense

3. At the end of the current period: transfer expenses to Profit and Loss

account

4. At the beginning of the next period: reverse prepaid expense

Slide

Accounting for Prepaid Expense

Step 2: Journalize

28/02/20X0 DR Insurance Expense £

CR Cash at bank £

31/08/20X0 DR Insurance Expense £

CR Cash at bank £

18/11/20X0 DR Insurance Expense £

CR Cash at bank £

31/12/20X0 DR Prepaid Expense £

CR Insurance Expense £

01/01/20X1 DR Insurance Expense £

CR Prepaid Expense £

Adjustment entry

for Prepaid

expense

Reversing entry

for the new period

31/12/20X0 DR Profit and Loss £

CR Insurance Expense £