AA015-CHAPTER 5

ADJUSTMENT AT THE END OF ACCOUNTING AA015
PERIOD CHAPTER 5

financial accounting
aa015

CHAPTER 5

ACCOUNTING UNIT
KELANTANIZZUE/KMKtPage 1 MATRICULATION COLLEGE

ADJUSTMENT AT THE END OF ACCOUNTING AA015
PERIOD CHAPTER 5

CHAPTER 5.0 ADJUSTMENT AT THE END OF ACCOUNTING PERIOD

5.1 BASIS OF ACCOUNTING

Cash-Basis Accounting Accrual-Basis Accounting
Revenue is recognized when cash is Revenues are recognised when services are
received. performed, or goods are delivered (rather
than when they receive cash).

Expense is recognized when cash is paid. Expenses are recognized when incurred
(rather than when cash is paid).

Profit = Cash Revenue - Cash Expenses Profit = Recognized Revenue - Incurred
Expense

Cash-basis accounting is not in accordance In accordance with Generally Accepted
with Generally Accepted Accounting Accounting Principles (GAAP).
Principles (GAAP).

5.2 DEFINITION OF REVENUES AND EXPENSES

Particular Revenues Expenses
Definition Acquisition of business Cost incurred from sales of
Revenues through sale of goods/services to generate
Concept goods and services revenues
Effects on owner’s Revenue Recognition concept Expense Recognition concept
equity Increase owner’s equity Reduce owner’s equity

5.3 REVENUES AND EXPENSES

Revenues Expenses
Revenue from operation: Operating expenses:

● Revenue obtained from core ● Expenses engaged in running the
business activity business operation.

● e.g.: Sales revenue and service ● e.g.: Transportation cost, wages,
revenue salaries and rent

Other revenues: Non-operating expenses:
● Obtained not from core activity

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● e.g.: interest revenue from savings, ● Expenses not directly engaged in
dividend received business main operation.

● Interest paid on loan, Loss on
disposal of assets.

5.4 REVENUE EXPENDITURES AND CAPITAL EXPENDITURES

Revenue Expenditures vs. Capital Expenditures

Any expenditure incurred to maintain the Any expenditure incurred to obtain an asset or

assets in working condition and for the Any expenditure incurred to bring an asset

business operation. into its working condition.

Decrease business profit. Improve the efficiency or working life of an
asset.

The benefit is received in the current The benefit is received over a period of more

period and sometimes recurring. than one year.

Report in the Statement of Profit and Loss Report in the Statement of Financial Position.
/ Statement of Comprehensive Income

e.g.: repair of furniture, cleaning of e.g.: purchase of machinery, installation cost
machinery, repainting of building. of machinery, custom duty on purchase of
machinery.

Guidelines in determining the Revenue Expenditure or Capital Expenditure
● Materiality- determine the amount involved either small or large. The large amount

and can impact items in the financial statement is considered material. Large amount
normally referred to Capital Expenditure.
● Frequency- high frequency or regular expenses do not involve large amount. This
normally referred to Revenue Expenditure.
● Extend the asset efficiency or its useful life- normally involves large amount and
referred to Capital Expenditure.

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5.5 RENENUES AND EXPENSES REPORTING

Revenue Statement Profit Revenue > Expense= Profit
Expense or Loss Revenue < Expense= Loss

Income measurement for a trading concern
SALES

COST OF GOODS SOLD

GROSS PROFIT
OPERATING EXPENSES

NET PROFIT

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Perniagaan Bersama

Statement of Profit or Loss

For The Year Ended 31st December 2020

RM RM
20,000
Sales (8,000)
12,000
(-) Cost of Goods Sold
(8,500)
Gross Profit 3,500

(-) Operating expenses

Advertising expense 3,100

Rent expense 4,900

Depreciation expense 500

Total Expenses

Net Profit

Perniagaan Seia Sekata

Statement of Profit or Loss

For The Year Ended 31st December 2020

RM RM
2,700
Revenues: Service Revenues
(1,700)
(-) Operating expenses 1,000

Advertising expense 500

Rent expense 400

Depreciation expense 800

Total Expenses

Net Profit

5.6 PURPOSE OF ADJUSTMENT- Why do we need adjusting entries.

● To ensure Revenue Recognition and Expense Recognition are followed.
Revenue recognition- recognize revenue in the current accounting
period.
Expense recognition- match expenses with revenues in the same
accounting period.

● It is in accordance with GAAP (Generally Accepted Accounting Principles)
before preparing financial statements.

● To ensure trial balance contains up-to-date and complete data.

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PERIOD CHAPTER 5

5.7 TYPES OF ADJUSTMENTS

● Unearned Revenue
● Accrued Revenue
● Prepaid Expenses
● Accrued Expenses/ Expenses Payable
● Depreciation Expenses
● Bad Debt Expenses

5.7.1 Unearned Revenues.

● Receive cash and record as a liability since goods/services not yet
delivered/performed.

● Unearned revenues often occur in regard to:
i. Rent
ii. Airline ticket
iii. Online purchase
iv. Customer deposit/booking

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

Dt. Unearned Service revenue XXX

Ct. Service Revenue XXX

OR

Dt. Service revenue XXX
XXX
Ct. Unearned Service
revenue

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Example 1:

Pioneer Advertising received RM 1,200 on 2nd October 2020 from Salman for
advertising services expected to be completed by 31st January 2021. Unearned Service
revenue shows a balance of RM 1,200 in the Trial Balance as at 31st December 2020.
Analysis reveals that the company performed RM 800 of advertisement in 2020.

Pioneer Advertising Ct.(RM)
Trial Balance as at 31st December 2020 1,200

Item Dt.(RM)
Unearned Service revenue

Adjusting entries: Dt.(RM) Ct.(RM)

Item
Dt.

Ct.

Example 2:

Pioneer Advertising received RM 1,200 on 2nd October 2020 from Salmah for
advertising services expected to be completed by 31st January 2021. Service revenue
shows a balance of RM 1,200 in the Trial Balance as at 31st December 2020. Analysis
reveals that the company performed RM 700 of advertisement in 2020.

Item Pioneer Advertising Ct.(RM)
Service revenue Trial Balance as at 31st December 2020 1,200

Dt.(RM)

Adjusting entries: Dt.(RM) Ct.(RM)

Item
Dt.

Ct.

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5.7.2 Accrued Revenues.

● Revenue for services performed but not yet received in cash or not yet
recorded. It is considered as an asset.

Revenue recorded Before Cash Receipt

● Accrued revenue often occurs in regard to:
1. Rent
2. Interest
3. Services

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

● Adjusting entry:
Increases (Dt) an asset account and increases (Ct) a revenue account.

Item Dt.(RM) Ct.(RM)
Dt. Accrued Revenue XXX XXX

Ct. Revenue

Example 3:

As of 31st December 2020, there was RM500 rental revenue has not been recorded by
Pioneer Advertising

Adjusting entries:

Item Dt.(RM) Ct.(RM)
Dt.

Ct.

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Example 4:

In December, Pioneer Advertising performed services worth RM2,000 that were not
billed to clients on or before 31 December 2020.

Adjusting entries:

Item Dt.(RM) Ct.(RM)
Dt.

Ct.

5.7.3 Prepaid Expenses

● Payment of cash, that is recorded as an asset to show the service or benefit
the company will receive in the future.

Revenue recorded Before Cash Receipt

● Prepaid Expenses often occur in regard to:
1. Insurance
2. Supplies
3. Advertising
4. Rent
5. Equipment
6. Buildings

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

Increases (Dt) to an expense account and Decreases (Ct) to an asset account.

Item Dt.(RM) Ct.(RM)
Dt. Insurance Expense XXX XXX

Ct. Prepaid Insurance(asset) Or Ct.(RM)
XXX
Item Dt.(RM)
Dt. Prepaid Insurance(asset) XXX

Ct. Insurance Expense

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Item Dt.(RM) Ct.(RM)
Dt. Supplies expense XXX XXX

Ct. Supplies(asset) Or Ct.(RM)
XXX
Item Dt.(RM)
Dt. Supplies(asset) XXX

Ct. Supplies expense

● Supplies (expire through use)

Example 5:

Pioneer Advertising purchased supplies costing RM2,500 on 5th October 2020. Pioneer
recorded the payment by increasing (Dt.) the asset supplies. This account shows a
balance of RM2,500 in the Trial Balance as at 31 December 2020. An inventory count
at the end of 31st December revealed that RM1,000 of supplies were still in hand.

Item Pioneer Advertising Ct.(RM)
Supplies Trial Balance as at 31st December 2020

Dt.(RM)
2,500

Adjusting entries as at 31st December: Dt.(RM) Ct.(RM)

Item
Dt.

Ct.

● Supplies (expire through use)

Example 6:

Pioneer Company purchased supplies costing RM2,500 on October 5. Pioneer
recorded the payment by increasing (Dt.) the supplies Expenses. This account shows
a balance of RM2,500 in the Trial Balance as at 31st December 2020. An inventory
count at the end of 31st December revealed that RM1,500 of supplies had been used.

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Pioneer Advertising
Trial Balance as at 31st December 2020

Item Dt.(RM) Ct.(RM)
Supplies expense 2,500 Ct.(RM)

Adjusting entries as at 31st December: Dt.(RM)

Item
Dt.

Ct.

● Insurance (expires with the passage of time)

Example 7:

On October 4, Pioneer paid RM600 for a one-year fire insurance policy. Coverage
began on October 1. Pioneer recorded the payment by increasing (Dt.) Prepaid
Insurance. This account shows a balance of RM600 in the Trial Balance as at 31st
December 2020.

Item Pioneer Advertising Ct.(RM)
Prepaid Insurance Trial Balance as at 31st December 2020

Dt.(RM)
600

Adjusting entries as at 31st December: Dt.(RM) Ct.(RM)

Item
Dt.

Ct.

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● Insurance (expires with the passage of time)

Example 8:

On October 4, Pioneer paid RM600 for a one-year fire insurance policy. Coverage
began on October 1. Pioneer recorded the payment by increasing (Dt.) Insurance
Expense. This account shows a balance of RM600 in the Trial Balance as at 31st
December 2020.

Item Pioneer Advertising Ct.(RM)
Insurance expense Trial Balance as at 31st December 2020

Dt.(RM)
600

Adjusting entries as at 31st December : Dt.(RM) Ct.(RM)

Item
Dt.

Ct.

5.7.4 Accrued Expenses / Expenses Payable

Expenses Recorded Before Cash Payment

● Accrued revenues often occur in regard to:
1. Rent
2. Interest
3. Taxes
4. Salaries

● Adjusting entry records the obligation and recognizes the expense.
● Adjusting entry:

Increases (Dt.) an expense account and increases (Ct.) a liability account.

Item Dt.(RM) Ct.(RM)
Dt. Expense XXX XXX

Ct. Accrued expense

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● Accrued Salaries and Wages

Example 9:

Pioneer Advertising paid salaries and wages on day first every month. Worker’s
salaries in December amounted to RM2,000 and were paid on 1st January.

Adjusting entries as at 31st December:

Item Dt.(RM) Ct.(RM)
Dt.

Ct.

5.7.5 Depreciation Expenses

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

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

● Accumulated depreciation is called a contra asset account.

● Adjusting entry: Dt.(RM) Ct.(RM)
XXX XXX
Item
Dt. Depreciation Expense

Ct. Accumulated Depreciation

Example 10:

For Pioneer Advertising, assuming that the depreciation on the equipment is RM500
a year.

Adjusting entries:

Item Dt.(RM) Ct.(RM)
Dt.

Ct.

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Statement Presentation

● Accumulated depreciation is a contra asset account (credit).
● An offset to asset accounts in the balance sheet (financial position statement).
● Book value is the difference between the cost of any depreciated asset and its

accumulated depreciation.

● Example: RM
Equipment 5,000
(500)
Less: Accumulated Depreciation- Equipment 4,500
Book value

5.7.6 Bad Debt Expenses

● Definition: 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 debtor
account should be closed.

● There are many reasons why a bad debt occurs. Among them are:
1. The debtor may have died.
2. The debtor may have become bankrupt.
3. The debtor may have disappeared.

● Adjusting entry:

Item Dt.(RM) Ct.(RM)
Dt. Bad Debt Expense XXX XXX

Ct. Account Receivable

Example 11:

On December 31st, the company successfully identified that a debtor named Sadat has
gone bankrupt and unable to pay its debt of RM 1,000.

Adjusting entries:

Item Dt.(RM) Ct.(RM)
Dt.

Ct.

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5.8 Correcting Entries Errors NOT affecting Trial Balance
1. Missed the transaction(omission)-
Errors affecting Trial Balance
1. An error in the journal (the entry has where the full transaction is omitted
from recording.
not yet been posted). 2. Mistake misstated- entering wrong
2. Journal entry is correct, however original figure or amount of account
3. Mistakes reciprocity- error of
mistake while posting to ledger. reversal of entries
3. Error in a journal entry that has 4. Error principle- takes place when an
item is in wrong class of account.
already been posted (both journal
and ledger are incorrect).

Examples:

1. Buying furniture RM10,000 in cash was recorded with the value of RM1,000.

2. Commissions received RM1,500 in cash was recorded as follows:

Dt. Commissions received RM 1,500

Ct. Cash RM 1,500

3. Pay RM2,000 in cash for repairs of damaged vehicle were recorded as follows:

Dt. Vehicle RM 2,000

Ct. Cash RM 2,000

5.9 Preparation adjusted Trial Balance

● It is prepared after all adjusting entries are journalized and posted.
● The purpose is to prove the EQUALITY of debit balances and credit balances in

the ledger.
● It is the primary basis for the preparation of financial statement.
● Financial statements are prepared using adjusted trial balance information.

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CHAPTER 5: ADJUSTMENT AT THE END OF ACCOUNTING PERIOD

Question 1
a) Define revenue and expenditure.
b) What is the difference between revenue expenditure and capital expenditure?

Question 2

Classify the items below to revenue expenditure and capital expenditure.

a. Buy a used truck for your business.
b. The annual cost of insurance and lorry road tax.
c. The cost of modifying the truck engine.
d. The cost of truck maintenance every month.
e. Buy new machines worth RM100,000.
f. The transportation cost to bring a newly purchased engine for the factory.
g. Cost of installing new machines is RM10,000.
h. Cost of repairing a damaged machine during operation.
i. Spend a total of RM5,500 to the machine in which RM5,000 is adding the engine

machine capacity and RM500 for the cost of repairing the machine.
j. Cost of painting the walls of new buildings.
k. After three-year, RM2,000 is used to paint a small part of the building in (j).

Question 3:

Perniagaan Sehati Sejiwa (PSS) is involved in a selling souvenirs business. Here is the Trial
Balance before adjustment on July 31st 2020:

Perniagaan Sehati Sejiwa RM
Trial Balance as at 31st July 2020
30,000
RM 18,000

Cash 14,200

Accounts Receivable 9,500

Office Supplies 1,700

Inventory on 1/8/2019 5,000

Vehicles 100,000

Accumulated depreciation – vehicle

Accounts Payable

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Capital 5,000 56,060
Drawings 70,000
Sales 35,000
Purchases 1,700 2,200
Sales return and allowance 1,200
Purchases return and allowance 500
Sales discount 1,100
Purchases discount 800 1,200
Carriage inwards 1,600
Carriage outwards 1,200
Prepaid Insurance
Interest income 3,560
Salaries expenses
Unearned rental income

179,760 179,760

Additional information:

1. Inventory on July 31st, 2019 is RM6,300.
2. Balance of office supplies on 31st July 2020 is RM200.
3. Salary expenses for the month of July 2020 amounted to RM500 remain unpaid.
4. Interest income worth RM200 has not been received.
5. Insurance purchased on May 1st, 2020 is for a period of one year.
6. Rental unearned income of RM1,000 services had been completed.
7. Depreciation of vehicles is 15% above cost.

REQUIRED:

a) Prepare the journal entries adjustment on July 31st, 2020.
b) Prepare Profit or Loss Statement for the year ended July 31st, 2020.
c) Prepare the Statement of Financial Position as at 31st July 2020.

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Question 4

Perniagaan Seiring Sejalan (PSS) is operating a business of selling clothes. Below is the
Trial Balance before adjustment on June 30th, 2020:

Perniagaan Seiring Sejalan RM
Trial Balance as at 30th June 2020
16,000
RM 18,000
51,800
Cash 15,200 70,000

Accounts Receivable 8,500 2,000
1,400
Inventory as at 1/7/2019 5,000
1,100
Vehicles 80,000 1,200

Vehicles Accumulated Depreciation

Accounts Payable

Capital

Drawings 5,000

Sales

Purchases 35,000

Sales return and allowance 2,700

Purchases return and allowance

Sales Discount 500

Purchases Discount

Carriage inward 800

Carriage outward 1,600

Wages on purchases 500

Insurance expenses 1,200

Interest income

Salary expenses 5,500

Rental income

161,500 161,500

Additional Information:

1. Inventory as at 30th June 2020 is RM6,300.
2. Insurance in advance is RM600.
3. Salary expenses of RM500 is still outstanding.

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4. Rental income services of RM400 has not been completed.
5. Interest income amounting RM200 has not been received.
6. A debtor has been declared bankrupt and his debts of RM400 become bad debts.
7. Depreciation expenses of vehicles is RM16,000.

REQUIRED:

a) Prepare the adjusting entries on June 30th, 2020.
b) Prepare a Statement of Profit or Loss for the year ended June 30th, 2020.
c) Prepare the Statement of Financial Position as at June 30th, 2020.

Question 5

The following lists are the trial balance of Perniagaan Comel before adjustment.

Perniagaan Comel

Trial Balance before adjustment
As at 30th June 2020

Items Debit (RM) Credit (RM)
40,200
Capital 78,200

Cash 9,500 7,800
12,000
Sales
138,200
Purchases 56,100

Accounts Receivable 5,400

Accounts Payable

Vehicles 60,000

Accumulated Depreciation - Vehicle

Prepaid insurance 1,800

Salaries 4,400

Inventory 1,000

Total 138,200

Additional information:
1. Closing Inventory as at 30th June 2020 is RM800.
2. Prepaid insurance is for a period of one year beginning 1st January 2020.
3. Accrued Salaries amounting RM400 for the month of June 2020.
4. Depreciation of vehicles made at the rate of 10% using straight-line method.
5. Up to June 30th2020, RM3,000 credit sales have not been recorded.

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YOU ARE REQUIRED TO:

a) Prepare adjustment journal entries for the above transactions (journal narration
omitted).

b) Prepare Statement of Comprehensive Income for the year ended June 30th,
2020.

c) Prepare Financial Position Statement as at June 30th, 2020.

Question 6

The lists below are the trial balance of Perniagaan Nautica before adjustment.

Perniagaan Nautica

Trial Balance

as at 31st December 2020(Before Adjustment)

Accounts Debit (RM) Credit (RM)

Cash 20,625 11,500
6,000
Accounts Receivable 14,125
Inventory, 1st January 2020 10,000 41,500
150,000
Prepaid Insurance 1,150
3,750
Equipment 30,000 212,750

Accumulated Depreciation - Equipment

Accounts Payable

Capital

Drawings 2,500

Sales

Sales returns 7,500

Purchases 106,850

Purchase returns

Salaries 12,750

Rental expenses 7,250

Total 212,750

Additional information:

1. Inventory as at 31st December 2020 worth RM 17,750.
2. Depreciation expenses for equipment amounting RM 5,750 per annum.
3. Accrued salaries amounting RM 315 as at 31st December 2020.
4. Insurance expenses are RM 325 for the year ended 2020.
5. Cash withdrawal of RM 275 yet to be recorded.

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YOU ARE REQUIRED TO:

a) Prepare adjustment journal entries for the above transactions (journal narration
omitted).

b) Prepare a Statement of Comprehensive Income for the year ended December
31st, 2020.

c) Prepare the Financial Position Statement as at 31st December 2020.

Question 7

Abdullah Sdn. Bhd. (ASB) is a business that offers a laundry service. ASB financial year
ended on June 30th of each year. The trial balance before adjustment as at 30th June 2020 is
as follows:

Abdullah Sdn. Bhd.

Trial Balance Before Adjustment
As at 30th June 2020

Accounts Debit (RM) Credit (RM)

Cash 20,700 60,000
13,100
Accounts Receivable 10,000 97,000
114,900
Equipment 185,000
285,000
Accumulated depreciation - Equipment

Vehicles 28,500

Accumulated depreciation - Vehicles

Capital

Drawings 5,000

Service Revenue

Advertisement expenses 14,300

Salaries expenses 15,600

Utility expenses 2,500

Insurance expenses 2,400

Miscellaneous expenses 1,000

285,000

Additional information:

1. Prepaid insurance amounting RM 1,650.

2. Sending washed laundry to Desa Aman Children's Welfare Home amounting
RM3,500 on 30th June 2020. The bill has yet to be submitted to the management
of the home.

3. Unearned revenue worth RM 25,600.

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4. Accrued Salaries amounting RM 1,570.

5. Depreciation is calculated using straight-line method at the following rates:
● Equipment - 15%
● Vehicles - 20%

YOU ARE REQUIRED TO:

a) Prepare journal entries to record the adjustments for the above additional
information (journal narration omitted).

b) Prepare Statement of Comprehensive Income for the year ended June 30th,
2020.

c) Prepare Financial Position Statement as at June 30th, 2020.

Question 8

The financial year of Sanguine Enterprise (SE) ended on June 30th every year. Below is the
list of account balances as at June 30th, 2020.

Cash Debit (RM) Credit (RM)
Accounts receivable 13,550
Prepaid insurance 37,500 51,000
Long-term investments 1,800 35,300
Land 20,000 33,500
Buildings 50,000 25,000
Accumulated depreciation - Buildings 137,500 3,000
Office equipment 222,500
Accumulated Depreciation - Office equipment 90,100 288,400
Accounts payable
Long-term loans (6% per annum) 10,000 5,500
Unearned rent revenue 2,250
Capital 90,000
Drawings 8,000
Sales
Purchases 3,050
Return on sales
Purchases return 15,000
Sales discounts (discounts allowed) 101,200
Purchase discounts (discounts received) 58,200
Inventories, July 1st, 2019
Salaries and wages expenses
Advertisement expenses

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Utility expenses 19,000
Repair expenses 11,550
666,450
666,450

Additional information:

1. Inventories as at June 30th, 2020 worth RM 23,550.

2. Insurance used during the year amounted to RM 800.

3. Interest on long-term loan to be paid 2 times a year, on June 30th and December
31st.

4. Depreciation of buildings and office equipment for the current year amounted to
RM 1,620 and RM 3,500 respectively.

5. Accrued salaries and wages amounting RM 1,050.

6. Unearned rent revenue of RM 1,000.
7. On 30th June 2020, a debtor, En. Ramli was declared bankrupt. His account

outstanding balance is RM 10,000. SE has decided to write off the account of
En. Ramli.

YOU ARE REQUIRED TO:

a) Prepare journal entries for adjustments for the related transactions.

b) Prepare Statement of Comprehensive Income for the year ended June 30th,
2020.

c) Prepare SE Financial Position Statement as at June 30th, 2020.

Question 9

The following information obtained from Dynasty Enterprise account balances for the year
ended December 31st, 2020.

Accounts RM
Capital (1st January 2020) 60,000
Van 10,000
Accumulated Depreciation - Van 2,000
Office equipment 15,000
Accumulated Depreciation - Office Equipment 3,000
Inventory (1st January 2020) 37,000
Cash 8,900

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Purchases 180,000
Sales 250,000
Bad Debts expenses
Accounts Receivable 300
Accounts Payable 50,000
Insurance expenses 16,450
Purchases Discount
Salaries expenses 500
Sales returns 750
Miscellaneous expense 23,500
Purchase return 2,500
Drawings 2,500
500
2,500

Additional information:
1. Inventories as at December 31st, 2020 is RM 25,000.
2. Insurance prepaid amounting RM 200.
3. Bad debts written off is RM 650.
4. Miscellaneous expenses of RM 250 is still outstanding.
5. Van depreciated at 20% per annum using reducing balance method.
6. Office equipment is depreciated at 10% per annum on a straight-line method.

YOU ARE REQUIRED TO:
a) Prepare journal entries adjustment (ignore the journal narration).
b) Prepare Statement of Comprehensive Income for the year ended December 31st,
2020.
c) Prepare the Financial Position Statement as at December 31st, 2020.

“Don’t stop when you are tired. Stop when you are done”
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