AA015 TOPIC 5

FINANCIAL ACCOUNTING
AA015

KOLEJ MATRIKULASI
NEGERI SEMBILAN
SESSION 2020/2021

TOPIC 5

ADJUSTMENT AT THE END OF
ACCOUNTING PERIOD

LEARNING OBJECTIVES

Basis of Accounting
Definition of Revenue and Expenses
Revenue and Expenses
Revenue Expenditures and Capital Expenditures
Revenue and Expenses Reporting
Purpose of Adjustment

LEARNING OBJECTIVES

Types of Adjustment
Correcting Entries
Preparation of Adjusted Trial Balance

Preparation of Financial Statements After Adjustment

Basis Accounting

Cash Basis Acrual Basis

Cash-Basis Accounting Accrual-Basis Accounting

 Revenues recognized when Transactions in the periods in which
cash is received. the events occur.

 Expenses recognized when Companies recognize revenues
cash is paid. when they perform services (rather
than when they receive cash).
 Cash-basis accounting is not
in accordance with generally Expenses are recognized when
accepted accounting incurred (rather than when paid).
principles (GAAP).
In accordance with generally
accepted accounting principles
(GAAP).

5

Definition Revenue and Expenses

REVENUES Definition EXPENSES
Cost of services /
Acquisition of Concept goods used to
business through generate revenue
the sale of goods / Effects
services Owners Recognition
equity Expenses Concepts
Revenue
Recognition Reducing Owners
Concepts Equity

Increase equity 6

Record of Revenue and Expenses

REVENUES EXPENSES

1. Revenue of Operations: 1. Operating Expenses:
The results obtained from core expense directly attributable primarily
business activities. Eg: engaged in perniagaan.
inventories Sales / Revenue Eg:Transport costs, wages, rental store
Service and rent, salaries

2. Revenue - other revenue: 2. Non Operating expense:
Results are not related to the main Expenses that are not directly related
activity. Eg: Revenue Bank to the main activity. Eg: Bank Loan
Deposit Interest, Dividends Interest, Loss on Disposal of Vehicles

7

Revenue expenditure VS Capital expenditure

Any expenditure incurred to Any expenditure incurred to
maintain the assets for the operation acquire an asset
of the business.
Improve the efficiency or substantial
Decrease the business profit working life of the asset

the benefit of which is received once the benefit of which is received over
a period time a period of more than one year.

Report in the Statement of Report in the statement
Profit or Loss of financial position
Eg: Purchase of ma8chinery, Fees
Eg: Repairs of furniture, paid for installation of machinery,
Purchase of stationery, Salaries Custom duty paid for import of
machinery

GUIDELINES FOR DETERMINING THE REVENUE
EXPENDITURE OR CAPITAL EXPENDITURE

m)

MATERIALITY THE FREQUENCY ASSET
OF EXPENSES EFFICIENCY

Determine the Regular expenses Expenses that
amount involved is usually do not extend the useful
involve large
material . amounts life or asset
The amount can efficiency, Usually
influence the items it involves the large
in the financial
amount.
statements

9

REPORTING REVENUES AND EXPENSES

REVENUES EXPENSES
EXPENSES
EXPENSES STATEMENT OF
PROFIT OR
LOSS

REVENUES

10

THE NEED FOR ADJUSTING
ENTRIES

Adjusting Entries m)

 Ensure that the revenue recognition and expense
recognition principles are followed.

 Necessary because the trial balance may not contain up-
to-date and complete data.

 Required every time a company prepares financial
statements.

 Will include one income statement account and one
balance sheet account.

11

Recognizing Revenues and Expenses

REVENUE RECOGNITION PRINCIPLE

Recognize revenue in the accounting period in which the
services have performed

EXPENSE RECOGNITION PRINCIPLE

All expenses are recorded when they incurred during the
period.

Types of Adjusting Entries

Deferrals Accruals

1. Prepaid Expenses. Expenses 1. Accrued Revenues
(Revenues receivable).
paid in cash before they are
used or consumed. Revenues for services
performed but not yet received
2. Unearned Revenues. in cash or recorded.

Cash received before services 2. Accrued Expenses
are performed. (Expenses payable).

Expenses incurred but not yet
paid in cash or recorded.

Deferrals

Prepaid Expenses

PAYMENT OF CASH, THAT IS RECORDED AS AN ASSET TO SHOW
THE SERVICE OR BENEFIT THE COMPANY WILL RECEIVE IN THE
FUTURE.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

 insurance
 supplies
 advertising
 rent

Deferrals

Prepaid Expenses

 Expire either with the passage of time or through use.
 Adjusting entry:

► Increase (debit) to an expense account and
► Decrease (credit) to an asset account.

Supplies Deferrals

Illustration: Pioneer Advertising

purchased supplies costing RM2,500 on

October 5. Pioneer recorded the payment

by increasing (debiting) the asset

Supplies. This account shows a balance

of RM2,500 in the October 31 trial

balance. An inventory count at the close

of business on October 31 reveals that

RM1,000 of supplies are still on hand.

Oct 31 Dr Supplies expenses 1500

Cr Supplies 1500

Insurance Deferrals

Illustration: On October 4, Pioneer

Advertising paid RM600 for a one-year fire

insurance policy. Coverage began on October

1. Pioneer recorded the payment by

increasing (debiting) Prepaid Insurance. This

account shows a balance of RM600 in the

October 31 trial balance. Insurance of RM50

(RM600 ÷ 12) expires each month.

Oct 31 Dr Insurance expense 50
Cr Prepaid insurance 50

Deferrals

Unearned Revenues

RECEIPT OF CASH THAT IS RECORDED AS A LIABILITY
BECAUSE THE SERVICE HAS NOT BEEN PERFORMED.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

 Rent  Magazine subscriptions
 Airline tickets  Customer deposits

Deferrals

Unearned Revenues

 Adjusting entry is made to record the revenue for
services performed during the period and to show the
liability that remains at the end of the period.

 Results in a decrease (debit) to a liability account and
an increase (credit) to a revenue account.

Deferrals

Unearned Revenues

Illustration: Pioneer Advertising received
RM1,200 on October 2 from R. Knox for
advertising services expected to be
completed by December 31. Unearned
Service Revenue shows a balance of
RM1,200 in the October 31 trial balance.
Analysis reveals that the company performed
RM400 of services in October.

October 31 Dr Unearned revenue 400
Cr Revenue 400

DO IT! Deferrals

Adjusting Entries for Deferrals

The ledger of Hammond Company, on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.

Debit Credit

Prepaid Insurance RM 3,600
Supplies 2,800
Equipment
Accumulated Depreciation—Equipment 25,000
Unearned Service Revenue
RM5,000
9,200

An analysis of the accounts shows the following.

1. Insurance expires at the rate of RM100 per month.

2. Supplies on hand total RM800.
3. During March, services were performed for one-half of the unearned

service revenue.

Prepare the adjusting entries for the month of March.

DO IT! Deferrals

Adjusting Entries for Deferrals

The ledger of Hammond Company, on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.

Debit Credit

Prepaid Insurance RM 3,600
Supplies 2,800
Equipment
Accumulated Depreciation—Equipment 25,000
Unearned Service Revenue
RM5,000
9,200

Prepare the adjusting entries for the month of March.

1. Insurance expires at the rate of RM100 per month.

Insurance Expense 100
Prepaid Insurance 100

DO IT! Deferrals

Adjusting Entries for Deferrals

The ledger of Hammond Company, on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.

Debit Credit

Prepaid Insurance RM 3,600
Supplies 2,800
Equipment
Accumulated Depreciation—Equipment 25,000
Unearned Service Revenue
RM5,000
9,200

Prepare the adjusting entries for the month of March.

2. Supplies on hand total RM800.

Supplies Expense 2,000
Supplies
2,000

DO IT! Deferrals

Adjusting Entries for Deferrals

The ledger of Hammond Company, on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.

Debit Credit

Prepaid Insurance RM 3,600
Supplies 2,800
Equipment
Accumulated Depreciation—Equipment 25,000
Unearned Service Revenue
RM5,000
9,200

Prepare the adjusting entries for the month of March.

3. During March, services were performed for one-half of the unearned
service revenue.

Unearned Service Revenue 4,600
Service Revenue
4,600

Accrued

Accrued Revenues

REVENUES FOR SERVICES PERFORMED BUT NOT YET
RECEIVED IN CASH OR RECORDED.

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

 Rent
 Interest
 Services

Accrued

Accrued Revenues

 Adjusting entry shows the receivable that exists and
records the revenues for services performed.

 Adjusting entry:

► Increases (debits) an asset account and
► Increases (credits) a revenue account.

Accrued

Accrued Revenues

Illustration: In October Pioneer Advertising
performed services worth RM200 that were not
billed to clients on or before October 31.

Oct. 31 200
Accounts Receivable 200

Service Revenue

On November 10, Pioneer receives cash of RM200 for the
services performed.

Nov. 10 Cash 200
Accounts Receivable 200

Accrued

Accrued Expenses

EXPENSES INCURRED BUT NOT YET PAID IN CASH OR RECORDED.

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:

 Rent  Taxes
 Interest  Salaries

Accrued

Accrued Expenses

 Adjusting entry records the obligation and recognizes
the expense.

 Adjusting entry:

► Increase (debit) an expense account and
► Increase (credit) a liability account.

Accrued

Accrued Expenses

ACCRUED SALARIES AND WAGES

Illustration: Pioneer Advertising paid salaries and wages on
October 26; the next payment of salaries will not occur until
November 9. The employees receive total salaries of RM2,000 for
a five-day work week, or RM400 per day.

Illustration 3-19

DO IT! Accrued

Adjusting Entries for Accruals

Micro Computer Services began operations on August 1, 2017. At the
end of August 2017, management prepares monthly financial
statements. The following information relates to August.

1. At August 31, the company owed its employees RM800 in
salaries and wages that will be paid on September 1.

2. On August 1, the company borrowed RM30,000 from a local
bank on a 15-year mortgage. The annual interest rate is 10%.

3. Revenue for services performed but unrecorded for August
totaled RM1,100.

Prepare the adjusting entries needed at August 31, 2017.

DO IT! Accrued

Adjusting Entries for Accruals

Prepare the adjusting entries needed at August 31, 2017.

1. At August 31, the company owed its employees RM800 in
salaries and wages that will be paid on September 1.

Salaries and Wages Expense 800
Salaries and Wages Payable 800

DO IT! Accrued

Adjusting Entries for Accruals

Prepare the adjusting entries needed at August 31, 2017.

1. On August 1, the company borrowed RM30,000 from a local bank
on a 15-year mortgage. The annual interest rate is 10%

Interest Expense 250
Interest Payable 250

DO IT! Accrued

Adjusting Entries for Accruals

Prepare the adjusting entries needed at August 31, 2017.

1. Revenue for services performed but unrecorded for August
totaled RM1,100.

Accounts Receivable 1,100
Service Revenue
1,100

Depreciation

 Buildings, equipment, and motor vehicles (assets
that provide service for many years) are recorded as
assets, rather than an expense, on the date
acquired.

 Depreciation is the process of allocating the cost of
an asset to expense over its useful life.

 Depreciation does not attempt to report the actual
change in the value of the asset.

► Allocation concept, not a valuation concept.

Depreciation

Illustration: For Pioneer Advertising, assume
that depreciation on the equipment is RM480
a year, or RM40 per month.

Oct. 31 40
Depreciation expense
40
Accumulated depreciation

Accumulated Depreciation is called a
contra asset account.

Depreciation

STATEMENT PRESENTATION

 Accumulated Depreciation is a contra asset account
(credit).

 Offsets related asset account on the balance sheet.
 Book value is the difference between the cost of any

depreciable asset and its accumulated depreciation.

BaBAdDDDeEbBtTsS

 Definition: a bad debt is a debt by a customer
(an asset to the business) that is almost certain
cannot be collected. Whenever a bad debt
occurs, the debtors account should be closed.

 There are many reasons why a bad debt can
occur. Among them are:

– The debtor may have passed away.
– The debtor may have become bankrupt.
– The debtor may have disappeared and cannot be

contacted.

BABDaDdEBDTSeb– tCsONT.

– The debtor simply cannot afford to pay anymore

 The bad debt account must be charged as expenses
in the Statement of Profit or Loss and Other
Comprehensive Income (SPLOCI).

 The double-entries are as follows:-

– Debit the Bad Debts account
Credit the respective Debtors accounts
(when the bad debts are written-off during the year)

Bad Debts

EXAMPLE

On 25 November 2010 the business has
been successfully identified that a debtor named
Badrul has gone bankrupt and unable to pay its
debts RM 1,000.

Debit the Bad Debts account 1000

Credit Account receivable- BADRUL 1000

(recorded bad debts written off)

40

CORRECTING ENTRIES

Errors affecting the trial balance Errors not affecting the trial balance

1. An error in the journal (the 1. Missed the transaction
entry has not yet been posted) 2. Mistakes misstated
3. Mistakes reciprocity
2. Journal entry is correct, 4. Error principle
however you made a mistake
while posting to the ledger 41

3.Error in a journal entry that
has already been posted (both
journal and ledger are
incorrect)

Adjusted Trial Balance

 Prepared after all adjusting entries are journalized and
posted.

 Purpose is to prove the equality of debit balances and
credit balances in the ledger.

 Is the primary basis for the preparation of financial
statements.

 Adjusted trial balance prepared after adjustments are
made.

 Financial statements prepared using the adjusted trial
balance information.