Balance Day Adjustments
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Balance Day Adjustments. Accrued Expenses. Your mobile phone bill shows that you have not settled last month’s amount. This month mobile phone bill shows an outstanding amount of $100 and the current amount of $80. Hence this outstanding amount of $100 is also known as accrued expense. .

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Balance day adjustments

Balance Day Adjustments

Accrued Expenses


Balance day adjustments

Your mobile phone bill shows that you have not settled last month’s amount. This month mobile phone bill shows an outstanding amount of $100 and the current amount of $80.

Hence this outstanding amount of $100 is also known as accrued expense.


Balance day adjustments accrued expenses

Balance Day Adjustments - Accrued Expenses

Phua CK is pretending to be calm but actually is very confused. He should have paid $12 000 for the rent for the period from January to December 2000.

Scenario 1

However, at the end of the period, he only paid $5 000 to Tan Ah Teck Pte Ltd due to negligence. He still owes the company $7 000. He does not know the correct entries to reflect this!


Let us help him

Let us help him.

End of accounting period – December 2000

Should have paid: $ 12 000

Paid only:$ 5 000

Owed:$ 7 000

This owing amount of $7 000 is also known as Accrued Rent Expense. Mr. Phua CK still owes Tan Ah Teck Ltd $7 000 that was not paid for the year of 2000.


Balance day adjustments accrued expenses1

Balance Day Adjustments - Accrued Expenses

Definition:

  • Are expense that have been incurred for the accounting period BUT amount not yet paid for by the business.


Balance day adjustments accrued expenses2

Balance Day Adjustments - Accrued Expenses

What is the nature of accrued expense?

Debit or Credit entry?

Yes…. Credit entry because it is a liability (still owe people $)


Balance day adjustments

Using Phua CK as an example.

If Mr. Phua remembered to pay the rent amount in full, then the entries will be:-

JOURNAL

Date Particulars Debit Credit

Year 2000

Dec 31 $12 000

$12 000

Rent Expense

Profit and Loss a/c

However, this is not the case.

An additional ledger needs to be created – Accrued Rent Expense


Balance day adjustments

JOURNAL

Date Particulars Debit Credit

Year 2000 $7 000

Dec 31 $7 000

Rent Expense

Rent Expense (Accrued)

RENT EXPENSES a/c

Year 2000 Dec 31 Bank$5 000

Year 2000 Dec 31 Profit & Loss$12 000

Bal c/d$7 000

$12 000

$12 000

Year 2001 Jan 1 Balb/d$7 000


Balance day adjustments

JOURNAL

Date Particulars Debit Credit

2000

Dec 31

Profit & Loss a/c $12 000

Rent Expense$12 000

(Being rent expense closing off to P&L a/c)

Profit & Loss Account

2000 Dec 31 Expenses $12 000

Balance Sheet as at Dec 2000

Liability

Accrued Rent Expense $7 000


Balance day adjustments accrued expenses3

Balance Day Adjustments - Accrued Expenses

Summary

  • Definition

  • Credit/Debit nature?

  • Is there a need to open another ledger for accrued expense?

  • Post this ledger to P/L or Balance Sheet?


Balance day adjustments

Balance Day Adjustments

Accrued Revenue


Balance day adjustments

Your father is very angry! Due to Economic crisis, the company your father is working for is unable to pay him salary for this month. However, his salary will be delayed till next month.


Balance day adjustments

  • Assume that your father is earning a monthly salary of $5 000. The company will pay in total of $10 000 to your father next month ($5 000 x 2), being one month of salary owing to your father. This owing salary is known as ACCRUED Salary. This applies same to firms whereby revenues owing to them is known as Accrued Revenues.

Definition

Are revenues earned for the current accounting period but not yet received as cash payment.


Accrued revenue outstanding revenue

Accrued Revenue/Outstanding Revenue

  • Mr Tan sub-lets a building for Phua CK for a monthly rental of $1 000. Due to Phua’s negligence, Mr Tan does not receive $12 000 for period from January to December 2000. Instead Mr Tan only receives $5 000 from Phua.

Scenario 1


Accrued revenue outstanding revenue1

Accrued Revenue/Outstanding Revenue

End of accounting period – December 2000

Should have received: $ 12 000

Only received:$ 5 000

Outstanding revenue:$ 7 000

This owing amount of $7 000 is also known asAccrued Rent Revenue. Mr. Tan still owes PCK Ltd $7 000 that was not paid for the year of 2000.


Accrued revenue outstanding revenue2

Accrued Revenue/Outstanding Revenue

1 Jan 2000

31 May 2000

31 Dec 2000

$ 5 000 received

$7 000 owing

$12 000 earned

JOURNAL

Date Particulars Debit Credit

Year 2000$7 000

Dec 31 $7 000

Rent Revenue (Accrued)

Rent Revenue


Accrued revenue outstanding revenue3

Accrued Revenue/Outstanding Revenue

RENT REVENUE a/c

Year 2000 Dec 31 Bank $5 000

Year 2000 Dec 31 Profit & Loss $12 000

31 Bal c/d $7 000

$12 000

$12 000

Year 2001 Jan 1 Bal b/d $7 000

PROFIT AND LOSS a/c

Year 2000 Dec 31 Rent $12 000

Revenue

17


Balance day adjustments

RENT REVENUE a/c

Year 2000 Dec 31 Bank $5 000

Year 2000 Dec 31 Profit & Loss $12 000

31 Bal c/d $7 000

$12 000

$12 000

Year 2001 Jan 1 Bal b/d $7 000

BALANCE SHEET AS AT 31 DEC 2000

Current Asset

Accrued Revenue $7 000


Balance day adjustments accrued revenue

Balance Day Adjustments - Accrued Revenue

  • Definition

  • Nature of the entry - Debit or Credit entry?

  • Distinguish the differences in adjustments between the Accrued Expenses and Accrued Revenues

Summary


Balance day adjustments

Balance day Adjustments

Prepaid Expenses


Balance day adjustments

Singtel has a promotion for new subscribers. If you paid the 6 months of mobile-phone monthly subscription upfront NOW, you get a free Nokia 8250.


Balance day adjustments

Assuming that the monthly subscription is $20. You like the promotion and paid $1 200 (6x$20) immediately in order to get the new mobile phone. Hence you are paying in advance for the expense.

The payment in advance of subscription fees ($1 200) is also known as Prepaid Expense.


Prepaid expense payment in advance

Prepaid Expense/Payment in Advance

Are expenses that have been paid in advance but NOT yet incurred for the current accounting period.

Definition


Balance day adjustments

Since expense is a debit entry. If the expense had been prepaid, what will be the nature of the entry?

Prepaid expense is like an asset to the firm as it is similar to people owing services to the firm. Hence a DEBIT ENTRY.


Prepaid expense payment in advance1

Prepaid Expense/Payment in Advance

Phua CK learnt his lesson last time of not paying on time last year, so he decides to pay in advance to “save his face” this year. The rent expense for the accounting year of 2001 is $12 000, but he pays $18 000. Hence he prepaid $6 000 for expenses that has not been incurred in 2001.

Scenario 2


Prepaid expense payment in advance2

Prepaid Expense/Payment in Advance

Recall that the monthly rent expense is $1 000. Hence from January to December 2001, the total rent is $12 000.

Phua CK prepaid rent expense of $6 000 for January to June 2002.

1 Jan 2001

31 Dec 2001

30 June 2002

$ 12 000 incurred

$6 000 prepaid

$18 000 paid


Balance day adjustments

JOURNAL

Date ParticularsDebit Credit

Year 2001 $6 000

Dec 31 $6 000

Rent Expense (Prepaid)

Rent Expense

RENT EXPENSES a/c

Year 2001 Dec 31 Bank$18 000

Year 2001 Dec 31 Balance c/d $ 6 000

Profit & Loss$12 000

$18 000

$18 000

Year 2002 Jan 1 Bal b/d$6 000


Balance day adjustments

Profit & Loss Account

2001 Dec 31 Expenses $12 000

Balance Sheet as at Dec 2001

Current Assets

Prepaid Rent Expense $6 000

Summary

  • Definition

  • Credit/Debit nature?

  • What are the differences in adjustments between the accrued and prepaid expenses?


Balance day adjustments

Balance Day Adjustments

Prepaid Revenue


Balance day adjustments

Balance Day Adjustments

You have found a part-time job in MacDonald for three months. Your monthly salary is $500. By the end of the first month, you should have received $500 of what you have earned. However, the manager is such a nice person that he gives you $1 000. (Two months’ salary). He understands that you need money to enjoy your school holidays.


Balance day adjustments1

Balance Day Adjustments

Received :$500 x 2

(Two month’s salary)

= $1 000

Earned :$500

Paid in advance :$500

This prepaid of salary (revenue) is known as Prepaid Revenue /Outstanding Revenue. $500 is the prepaid Revenue.


Prepaid revenue outstanding revenue

Prepaid Revenue/ Outstanding Revenue

DEFINITION

Are revenues received in advance for which the services not yet rendered/earned in the particular accounting year.

Hence the received cash for such revenues is not considered as revenues for the current accounting year.


Prepaid revenue outstanding revenue1

Prepaid Revenue/ Outstanding Revenue

  • Recall that Mr Phua CK decided to pay in advance his rents to “save face”. Hence Mr Tan received $18 000, in which $12 000 is the revenue earned for the accounting year of 2001 and $6 000 is prepaid revenue.

Scenario 2


Prepaid revenue outstanding revenue2

Prepaid Revenue/ Outstanding Revenue

1 Jan 2001

31 Dec 2001

31 June 2002

$ 12 000 earned

$6 000 in advance

$18 000 received

JOURNAL

Date ParticularsDebitCredit

Year 2001 $6 000

Dec 31$6 000

Prepaid Rent Expense

Rent Expense


Prepaid revenue outstanding revenue3

Prepaid Revenue/ Outstanding Revenue

RENT REVENUE a/c

Year 2001 Dec 31 Bank $18 000

Year 2001 Dec 31 Profit & Loss $12 000

Prepaid rent $6 000 Revenue

$18 000

$18 000

PROFIT AND LOSS a/c

Year 2001 Dec 31 Rent $12 000

Revenue


Prepaid revenue outstanding revenue4

Prepaid Revenue/ Outstanding Revenue

PREPAID RENT REVENUE a/c

Year 2001 Dec 31 Bal c/d $6 000

Year 2001

Dec 31

Rent Revenue $6 000

$6 000

$6 000

Year 2002 Jan 1 Bal b/d $6 000

BALANCE SHEET AS AT 31 DEC 2001

Current Liabilities

Prepaid Revenue $6 000


Balance day adjustments prepaid revenue

Balance Day Adjustments - Prepaid Revenue

  • Definition

  • Nature of the entry

  • Distinguish the differences in adjustments between accrued revenues and prepaid revenues

Summary


Balance day adjustments

Practice!

Accrued & Prepaid Revenues


Practice accrued and prepaid revenues

Practice - Accrued and Prepaid Revenues

Trial Balance as at 31 August 2001

Particulars DebitCredit

$ $

Rent 1 500

Commission7 000

Adjustments

$300 of the rent revenue was received in advance.

The monthly commission was $700. The accounting period is from 1 July 2000 to 31 August 2001


Practice accrued and prepaid revenues1

Practice - Accrued and Prepaid Revenues

JOURNAL

Particulars Debit Credit

$$

Rent Revenue 300

Prepaid Rent Revenue 300

(Being amount of revenue received in advance)

1

Accrued Commission Revenue 1 400

Commission Revenue 1 400

(Being revenue earned but not yet received)

2


Balance day adjustments

1

Prepaid Rent Revenue

Rent Revenue

$

$

Prepaid Rent Rev 300

Cash at Bank 1 500

Profit & Loss 1 200

Prepaid Rent Revenue

$

$

Bal c/d 300

Rent Revenue 300

Profit & Loss for the year ended 31 Aug 2001

$

$

Rent Revenue 1 200

Balance Sheet as at 31 Aug 2001

$

Current Liability

Prepaid Rent Rev300

$


Balance day adjustments

2

Accrued Commission Revenue

Commission Revenue

$

$

Profit & Loss 8 400

Cash at Bank 7 000

Accrued Comm Rev 1 400

Accrued Commission Revenue

$

$

Rent Revenue 1 400

Bal c/d 1 400

Profit & Loss for the year ended 31 Aug 2001

$

$

Rent Revenue 8 400

Balance Sheet as at 31 Aug 2001

$

Current Asset

Accrued Comm Rev 1 400

$


Conclusion

Credit Entry

Debit Entry

Debit Entry

Credit Entry

Conclusion

1.Definition

Amount incurred for the accounting period but not yet paid for.

Accrued Expenses

Amount not yet incurred for the accounting period buy have been paid for.

Prepaid Expenses

Amount earned for the accounting period but not yet received as cash payment.

Accrued Revenues

Amount not earned for the accounting period but have been paid for.

Prepaid Revenues


Conclusion1

Conclusion

2.Adjustments

Dr Expense A/C

Cr Accrued Expense A/C

Accrued Expenses

Dr Prepaid Expense A/C

Cr Expense A/C

Prepaid Expenses

Dr Accrued Revenue A/C

Cr RevenueA/C

Accrued Revenues

Dr Revenue A/C

Cr Prepaid Revenue A/C

Prepaid Revenues


Conclusion2

Conclusion

3.Balance Sheet

Current Liability

Accrued Expenses

Current Assets

Prepaid Expenses

Current Assets

Accrued Revenues

Current Liability

Prepaid Revenues


Balance day adjustments

Practice!

Accrued & Prepaid Expenses


Practice accrued and prepaid expenses

Practice - Accrued and Prepaid Expenses

  • During the year of 2001, the cash book shows:

    • maintenance Expense$ 900

    • Selling Expense$1 200

  • On 31 May 2001, the Balance Sheet also shows

    • Prepaid Maintenance Expense$ 400

    • Accrued Selling expense$ 300

  • Find the actualamount of the expenses incurred for the year of 2001.


  • Balance day adjustments

    1

    Prepaid Maintenance Expense

    Maintenance Expense

    $

    $

    Cash at Bank 900

    Profit & Loss

    500

    Prepaid Maint Exp 400

    900

    900

    2

    Accrued Selling Expense

    Selling Expense

    $

    $

    Cash at Bank 1 200

    Profit & Loss

    1 500

    Accrued Selling Exp 300

    1 500

    1 500


    Balance day adjustments

    • Page 148


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