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BALANCE DAY ADJUSTMENT

AND PREPARATION OF
FINAL ACCOUNTS-ACCRUAL
AND PREPAYMENTS

Adjusting entries
Adjusting entries are general journal

entries made at the end of an accounting


period in order to determine correctly the
revenues earned and the expenses
incurred for an accounting period
In this way, a more accurate profit figure

can be obtained from the books of


accounts

Continued
Types of adjusting entries
Adjusting entries

Expenses
Accrued

Revenues
Prepaid

Accrued

Prepaid

Accrued expenses
These are expenses that have been incurred but

not yet paid and therefore must be recorded at


the end of accounting period
Accrued expenses can be called as owing
expenses, outstanding expenses or expenses in
arrears
At the end of accounting period, such an expense
will be considered as a current liability in SOFP
Journal entry at the end of accounting period
Debit
Expense a/c
Credit
Accrued expense a/c

ILLUSTRATION 1- ACCRUED
EXPENSES
In the financial year ending 31/12/2015,
total salaries and wages should be at
RM30,000. But according to the salaries
and wages account, it shows that only
RM20,000 have been paid.

ILLUSTRATION 1- Accrued Expenses


Extract Income Statement:

Statement Of Profit or loss for the year ended


31/12/2015(RM)
Gross profit XXXX
Less: Expenses
Salaries and wages (20000+10000)
30,000
Extract Balance Sheet:
Statement of Financial Position as at 31/12/2009 (RM)
Current Liabilities
Accrued Salaries and Wages
10,000

Prepaid expenses
Expenses which have been paid for in advance

or not yet used up in the current period and


therefore should not appear in the current
period accounts
Also known as unexpired cost
The item shown as current asset in the SOFP
Journal entry at the end of accounting period
Debit
Prepaid expense a/c
Credit
Expense a/c

ILLUSTRATION 2- PREPAID
EXPENSES
On 31/12/15, the amount of rent of AAN
Enterprises trial balance was RM20,000. Out of
this, RM300 was rent paid in advance.

ILLUSTRATION 2- Prepaid Expenses


Extract Income Statement:

Statement Of Profit or loss for the year ended


31/12/2015(RM)
Gross profit XXXX
Less: Expenses
Rent
(20000-300)
19,700
Extract Balance Sheet:
Statement of Financial Position as at 31/12/2015 (RM)
Current Asset
Prepaid Rent
300

Accrued revenue
These are revenues which has been earned but

not yet received in terms of payment


Such an amount will be considered as a current
asset in the balance sheet of the business at the
end of accounting period
Journal entry at the end of accounting period
Debit
Accrued revenue a/c
Credit
Revenue a/c

ILLUSTRATION 3- Accrued
Revenue
On 31/12/15, the commission earned by the
business but not yet received amounted to RM
5,000.

ILLUSTRATION 3- Accrued Revenues


Extract Income Statement:

Statement of profit or lossfor the year ended


31/12/2015 (RM)
Gross profit XXXX
Add: Revenues
Commission Received
5,000
Extract Balance Sheet:
Statement of Financial Position as at 31/12/2015 (RM)
Current Asset
Accrued Commission Received
5000

Prepaid revenue
Revenue which has been received in advance

from a customer but not yet been earned for that


period.
Also called as unearned revenue, deferred
revenue
Such an amount can be considered as current
liability
Journal entry at the end of accounting period
Debit
Revenue a/c
Credit
Prepaid revenue a/c

ILLUSTRATION 4- Prepaid
Revenue
Alya received 12 months rent revenue for RM12,000
starting from 1 March 2015 for accounting period
ended 31/12/15
Answer:
Only 10 months rent should be received/earned for
the year ended 2015, another 2 months is prepaid
rent revenue.

ILLUSTRATION 4- Prepaid Revenues


Extract Income Statement:

Statement of profit or loss for the year ended


31/12/2015(RM)
Gross profit XXXX
Add: Revenues
Rent Revenue (12000-2000)
10,000
Extract Balance Sheet:
Statement of Financial Position as at 31/12/2015 (RM)
Current Liabilities
Prepaid Rent Revenue
2,000

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