Ch 6 accruals and prepayment
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Ch 6 accruals and prepayment

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  • 1. CHAPTER 6ADJUSTMENTS FOR ACCRUALS AND PREPAYMENTS
  • 2. LEARNING OBJECTIVES To make adjustments for accrued & prepaid expenses To make adjustments for revenues owing & revenues received in advance To ascertain the actual amount of expense & revenues in the Profit & Loss Account To show the recording of accruals & prepayments in the Balance Sheet
  • 3. INTRODUCTION In the trial balance, as far as expenses are concerned, it records only the expenses paid for the period. So do the revenues where it records only the revenues received during the period. Therefore, adjusting entries are made at the end of the accounting period to ensure that revenues are recorded in the period in which they are earned, & expenses are recognized in the period which they are incurred. This is to get the correct figure for net profit during the period.
  • 4. TYPES OF ADJUSTING ENTRIES FOR NOMINAL ACCOUNTSRevenues & expenses - Before making adjustments,accounts are considered as one must observed thenominal accounts. Adjusting following:entries for nominal accounts • The accounting periodcan be classified into the • Any balances b/d at thefollowing categories: beginning of the year Expenses Revenues • Any balances b/d at thePrepaid Revenues end of the yearexpenses or received in • Amount actually paidexpenses paid advance or during the yearin advance unearned revenues • Amount actually charged to the TPL accounts duringAccrued Accruedexpenses or revenues or the yearexpenses owing revenues owing
  • 5. PREPAID EXPENSES Prepaid expenses are Journal Entries: payment of expenses Debit Credit that will benefit more a) To record the Expenses Bank / than one accounting expenses paid cash period. b) To record the Expenses Expenses Prepaid expenses often adjusting entries Prepaid occur with regard to c) To transfer the Profit & Expenses insurance, rent & expenses incurred Loss during the year to advertising. P&L a/c (closing An asset-expense entries) relationship exists with e) Balance for Expenses Expenses prepaid expenses. prepaid expense Prepaid should be Prepaid expenses will be transferred to the treated as current asset insurance in the Balance Sheet expense a/c.
  • 6. PREPAID EXPENSES (cont’d)ExampleDani Trading took a yearly insurance policy of RM600 on 1 June2005. The accounting period ends 31 December each year. Thebusiness has agreed to pay insurance premium at the rate ofRM200 every 4 month. Payment made are as follows: Date of Payment Amount Month Paid 1 June 2005 RM200 June 2005 to Sept. 2005 1 October 2005 RM200 Oct. 2005 to Jan. 2006Show the appropriate adjusting entries on 31 December 2005 1 February 2006 RM200 Feb. 2006 to May 2006Monthly insurance premium : RM600/12 = RM50Insurance Expense : 1 June to 31 December : 7 months x RM50 = RM350Insurance Prepaid : 1 month x RM50 = RM50
  • 7. PREPAID EXPENSES (cont’d)Journal Entries:Date Recording Process Debit Credit2005 a) To record insurance expenses Insurance BankJune 1 paid amount RM 200 ExpenseOct 1 b) To record insurance expenses Insurance Bank paid amount RM 200 ExpenseDec 31 c) To record insurance prepaid Insurance Insurance amount RM50 Prepaid ExpenseDec 31 d) To transfer insurance Profit & Insurance expenses to P&L a/c Loss a/c Expense amount RM 3502006 e) Balance for prepaid expense Insurance InsuranceJan 1 should be transferred to the Expense Prepaid insurance expense a/c.
  • 8. PREPAID EXPENSES (cont’d) Insurance Expense01/06/05 Bank 200 31/12/05 Insurance Prepaid 5001/10/05 Bank 200 31/12/05 Profit & Loss 350 400 40001/01/06 Insurance Pre. 50 Insurance Prepaid31/12/05 Insurance exp. 50 31/12/05 Balance c/d 5001/01/06 Balance b/d 50 01/01/06 Insurance Exp. 50 Profit and LossInsurance Expense 350 Balance Sheet as at 31/12/05Current AssetsInsurance Prepaid 50
  • 9. ACCRUED EXPENSESAccrued expenses Journal Entries: Debit Credit are expenses a) To record the Expenses Bank / incurred but unpaid. expenses paid cashA liability-expense b) To record the Expenses Accrued relationship exists adjusting Expenses with accrued entries expenses. c) closing entries Profit & ExpensesAccrues expenses Loss will be treated as d) Transfer the Accrued Expenses current liability in the balance to the Expenses credit side of balance sheet. the expense a/c (opening entries)
  • 10. ACCRUED EXPENSES (cont’d)ExampleDani Trading rent a stall on 1 October 2005 at the rate of RM100per month payable at the end of each month. The accountingperiod ends 31 December each year. Payment made are asfollows: Date of Payment Amount Month Paid 31 October 2005 RM100 October 2005 30 November 2005 RM100 November 2005 5 January 2006 RM100 December 2005Rental for the month of December 2005 was only paid in January2006. Show the appropriate adjusting entries at the end ofaccounting period.Rental paid ( Oct & Nov 2005) : 2 months x RM100 = RM200Accrued Rental (Dec 2005) : 1 month x RM100 = RM100
  • 11. ACCRUED EXPENSES (cont’d)Journal Entries:Date Recording Process Debit Credit2005 a) To record rental paid amount Rent BankOct 31 RM 100 ExpensesNov 30 b) To record rental paid amount Rent Bank RM 100 ExpensesDec 31 c) To record accrued rental Rent Rent amount RM100 Expenses AccruedDec 31 d) To transfer Rent Expenses to Profit & Rent P&L a/c amount RM 300 Loss a/c Expenses2006 e) Balance for accrued expense Rent RentJan 1 should be transferred to the Accrued Expenses Rent Expenses a/c.
  • 12. ACCRUED EXPENSES (cont’d) Rent Expense31/10/05 Bank 100 31/12/05 Profit & Loss 30030/11/05 Bank 10031/12/05 Rent Accrued 100 300 300 01/01/06 Rent Accrued 100 Rent Accrued31/12/05 Balance c/d 100 31/12/05 Rent Expense 10001/01/06 Rent Expense 100 01/01/06 Balance b/d 100 Profit and LossRent Expenses 300 Balance Sheet as at 31/12/05 Current Liabilities Accrued Expenses 100
  • 13. REVENUE RECEIVED IN ADVANCE Also known as unearned Journal Entries: revenue Debit Credit Payment received for a) To record the Bank / Revenue services to be provided in payment cash Received a future accounting received period, revenue received b) To record Revenue Revenue in advance a/c should be revenue Received Received credited. received in in An adjusting entry is made advance advance to record the revenue that c) Closing entries Revenue Profit & has been earned & to Received Loss show the liability that d) Transfer the Revenue Revenue remains. balance to the Received Received Revenue received in credit side of the in advance treated as revenue advance current liabilities in the received balance sheet. (opening entries)
  • 14. REVENUE RECEIVED IN ADVANCE (cont’d)ExampleDani Trading rent out part of its office on 1 October 2005at a rental of RM200 per month & receivable at the end ofeach month. The accounting period ends 31 Decembereach year. Rental received is as follows: Date of Payment Amount Month Paid 31 October 2005 RM200 October 2005 30 November 2005 RM200 November 2005 31 December 2005 RM400 Dec. 2005 & Jan. 2006
  • 15. REVENUE RECEIVED IN ADVANCE (cont’d)Journal Entries:Date Recording Process Debit Credit2005 a) To record Rent received amount Bank RentOct 31 RM 200 ReceivedNov 30 b) To record Rent received amount Bank Rent RM 200 ReceivedDec 31 c) To record Rent received amount Bank Rent RM 400 ReceivedDec 31 d) To record Rent received in Rent Rent advance amount RM 200 Received Received in advanceDec 31 e) To transfer Rent received to P&L Rent Profit & Loss a/c amount RM 300 Received a/c2006 f) Balance for unearned revenue Rent RentJan 1 should be transferred to the Received in Received Revenue Received a/c. advance
  • 16. REVENUE RECEIVED IN ADVANCE (cont’d) Rent Received31/10/05 Rent Received 200 31/10/05 Bank 200 in advance31/12/05 Profit & Loss 600 30/11/05 Bank 200 31/12/05 Bank 400 800 800 01/01/06 Rent Received in advance 200 Rent Received in Advance31/12/05 Balance c/d 200 31/12/05 Rent Received 20001/01/06 Rent Received 200 01/01/06 Balance b/d 200 Profit and Loss Rent Received 600 Balance Sheet as at 31/12/05 Current Liabilities Rent Received 200 in Advance
  • 17. ACCRUED REVENUERevenues earned Journal Entries: from services that Debit Credit a) To record the Bank / Revenue have been cash received cash Received performed but b) To record Accrued Revenue neither billed nor Accrued Revenue Received collected or Revenues recorded. c) Closing entries Revenue Profit &Accrued Revenue Received Loss d) Transfer the Revenue Accrued treated as current balance to the Received Revenue assets in the debit side of the balance sheet. revenue received (opening entries)
  • 18. ACCRUED REVENUE (cont’d)ExampleDani Trading rent out part of its office on 1 October 2005 at arental of RM200 per month & receivable at the end of eachmonth. The accounting period ends 31 December each year.The rent received schedule is as follows: Date of Payment Amount Month Paid 31 October 2005 RM200 October 2005 30 November 2005 RM200 November 2005 10 January 2006 RM400 December 2005
  • 19. ACCRUED REVENUE (cont’d)Journal Entries:Date Recording Process Debit Credit2005 a) To record Rent received Bank RentOct 31 amount RM 200 ReceivedNov 30 b) To record Rent received Bank Rent amount RM 200 ReceivedDec 31 d) To record Rent accrued Rent Rent amount RM 200 Accrued ReceivedDec 31 e) To transfer Rent received to Rent Profit & P&L a/c amount RM 600 Received Loss a/c2006 e) Balance for accrued revenue Rent RentJan 1 should be transferred to the Received Accrued Revenue Received a/c.
  • 20. ACCRUED REVENUE (cont’d) Rent Received31/12/05 Profit & Loss 600 31/10/05 Bank 200 30/11/05 Bank 200 31/12/05 Rent Accrued 200 600 60001/01/06 Rent Accrued 200 Rent Accrued31/12/05 Rent Received 200 31/12/05 Balance c/d 20001/01/06 Balance b/d 200 01/01/06 Rent Received 200 Profit and Loss Rent Received 600 Balance Sheet as at 31/12/05Current AssetsRent Accrued 200