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TOPIC 5ADJUSTMENT ACCOUNTS

INTRODUCTION

ACCRUAL BASIS AND

CASH BASIS

ACCOUNTING

ACCRUAL BASIS

ACCOUNTING

In accrual basis accounting, revenues are recorded when goods or services were sold regardless of whether cash has been received or not, while expenses were recorded when goods or services are used regardless whether they were paid or not. In other word, in accrual basis accounting, both revenues and expenses are recorded when they occur.

CASH BASIS

ACCOUNTING

In cash basis accounting, revenues was recorded when cash was received and expenses was recorded when cash paid.

ACCRUAL BASIS

ACCOUNTING

CASH BASIS ACCOUNTIN

G

ACCRUALS AND PREPAYMENTS

• After the Trial Balance has been drawn up, there are adjustments that must be made to the balances found in the Trial Balance.

• The balances of expenditure and revenue which are shown in the Trial Balances are those of expenditure that have been paid and revenue where cash has been received.

• Adjustments must be made for the following:• Accrued expenses• Prepaid expenditure• Accrued revenue• Unearned revenue

INTRODUCTION

ACCRUAL BASIS

ACCRUED EXPENSES• Accrued expenses are expenses have

not yet paid but goods and services already in used or received.

• The balances of expenditures accounts show in trial balance are the total expenditures paid during the accounting period but the amount may not really for the whole of the accounting period incurred.

• Accrued expenses happened when total expenditures paid less than total expenditure incurred for the accounting period and it must include into expenditures account before posting to Statement of Comprehensive Income (SOCI) and record them as current liabilities in Statement of Financial Position.

• Example of accrued expenses are:

ACCRUAL BASIS

ACCRUAL BASIS

Date Particulars F Debit (RM) Credit (RM)2013Dec 31

Salary Accrued Salary(Salary not yet paid)

400  400

Dec 31 SOCI Salary(Closing entry)

2 400  2 400

ACCRUAL BASISThe adjusting entry:a.General Day Book

ACCRUAL BASISb.General Ledger

Note:

RM 2 000 of the salary was paid, but the total amount transferred to the Statement of Comprehensive Income (SOCI) is the salary that should have been paid, which is RM2 400.

This amount includes RM400, which was accrued and not yet paid. This accrued expense is recorded as a Current Liability in the Statement of Financial Position (SOFP).

ACCRUAL BASIS

B. PREPAID EXPENSES• Prepaid expenses are expenses that have already paid but the goods

and services will only be used in the following accounting period.• The balances expenditures accounts show in the SOFP are the total

expenditures paid during the accounting period but the amount may not really for the whole of the accounting period incurred.

• Prepaid expenses happened when total expenditures paid is more than total expenditure incurred for the accounting period and it must exclude from expenditures account before posting to Statement of Comprehensive Income (SOCI) and record them as current assets in Statement of Financial Position (SOFP).

ACCRUAL BASIS

ACCRUAL BASISExample of prepaid expenses are:B. PREPAID EXPENSES1. The adjusting entry for accrued expenses is

as follows: Dr Prepaid Expenses Account

Cr Expenses Account2.  The closing entry for the accrued expenses is

as follows: Dr SOCI

Cr Expenses Account   

ACCRUAL BASISExample:The following information was extracted from the book of Bestari CompanyTrial Balance as at 31 December 2013

Additional information:Insurance covered for the period of 1st March 2013 to 28 February 2014

  Dr (RM) Cr (RM)

Insurance 6 000  

Working:Insurance for the year = RM6 000 X 10 months / 12 months = RM 5 000 (total insurance covered for the period ended 31 Dec 2013) Therefore:Prepaid insurance = Actual expenses paid – Actual expenses incurred= RM6 000 – RM5 000= RM1 000

ACCRUAL BASIS

The adjusting entry:General day book

ACCRUAL BASIS

Date Particulars Fol Debit (RM) Credit (RM)

2013Dec 31

Prepaid insurance Insurance(Prepaid insurance for the year)

  1 000  1 000

31 SOCI Insurance(Closing entry)

  5 000  5 000

ACCRUAL BASISb.General ledger

Note:• The insurance paid during the accounting period was RM6

000 but total amount transfer to Statement of Comprehensive Income (SOCI) was RM5 000 which is the actual amount should be recognized into SOCI.

• The prepaid insurance which is RM1 000 is for the next accounting period. The prepaid insurance will be recorded as current asset in Statement of Financial Position (SOFP) and will be recognized as an expense in the next accounting period

Statement of Financial Position as at 31 Dec 2013

RM

Current Assets:

Prepaid insurance 1 000

ACCRUAL BASIS

C. ACCRUED REVENUE

Accrued revenue is income that has not yet received but goods and services already in used or received.

The balances of income accounts show in the trial balance are the total income received during the accounting period but the amount may not really for the whole of the accounting period incurred.Accrued revenue happened when total income received less than total income recognized for the accounting period and it must include into revenue account before posting to SOCI and be recorded as current asset in SOFP.

ACCRUAL BASIS

UNEARNED REVENUEExample of accrued revenue is interest on fixed deposits, commission on purchases.

The adjusting entry for accrued revenue is as follows

 

The closing entry for accrued revenue is as follow

ACCRUAL BASIS

Dt Revenue account XXX Ct. Statement of Income Statement XXX

Dt Accrued revenue account XXX Ct. Revenue Account XXX

ACCRUAL BASIS

Date Particulars Fol Debit (RM) Credit (RM)

2013Dec 31

Rental revenues                                             Advance  rental revenues(To  record unearned  rental revenues)

  1 500  1 500

        31 Rental revenues         SOCI(Closing entry)

  18 000  18 000

ACCRUAL BASIS

ACCRUAL BASIS

ACCRUAL BASIS

THE END