ADJUSTING ENTRIES

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
Sale of goods or services
Creates Incurs

Revenue Matched
Revenue>Expenses

Expenses

Revenue<Expenses

Profit

Loss

Continued
THUS

PROFIT = Revenue earned Expenses incurred

Continued
Types of adjusting entries
Adjusting entries

Expenses

Revenues

Accrued

Prepaid

Accrued

Prepaid

Continued
Need to adjust (Expenses)
1.

Some expense items that have been incurred but not yet paid and therefore not recorded in the current periodaccrued expenses Some expense items that have been paid in advance and should not appear in the currents period account prepaid expenses

2.

Continued
Need to adjust (Revenue):
1.

Some revenue items which are earned but not yet received and therefore not yet recorded in the current period accrued revenue Some revenue items have been received and recorded as revenue but not yet been earned for that period prepaid revenue

2.

Continued
Based on the ACCRUAL CONCEPT
The accruals concept dictates that expenses are recognized as they are incurred, not when the money is paid and revenues are recognized as they are earned, not when the money is received

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 the balance sheet 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 31/12/2008, 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. Make the necessary journal entries and draw up the salaries and wages account

ILLUSTRATION 1- ACCRUED EXPENSES

Answer:
Journal entry: 31/12/2008

Dr

Salaries & Wages RM10,000 Cr Accrued Salaries RM10,000 & Wages

ILLUSTRATION 1- ACCRUED EXPENSES

Ledger Entry:
Salaries and wages account 31/12/08 Bank 20000 31/12/08 IS 30000

Accrued salaries

10000

and wages

30000

30000

Accrued salaries and wages account 31/12/08 Bal c/d 10000 31/12/08 Salaries & 10000

Wages

10000

10000

ILLUSTRATION 1- Accrued Expenses

Extract Income Statement:

Income Statement for the year ended 31/12/2008(RM) Gross profit XXXX Less: Expenses Salaries and wages 30,000 Extract Balance Sheet: Balance Sheet as at 31/12/2008 (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 balance sheet Journal entry at the end of accounting period Debit Prepaid expense a/c Credit Expense a/c

ILLUSTRATION 2- PREPAID EXPENSES

On 31/12/08, the amount of rent of AAN Enterprises trial balance was RM20,000. Out of this, RM300 was rent paid in advance. Answer: Journal entry: 31/12/08 Dr. Prepaid Rental RM300 Cr. Rental RM300

ILLUSTRATION 2- PREPAID EXPENSES

Ledger Entry:
Rental account 31/12/08 Bank 20000 31/12/08 Prepaid Rental 300

Income Statement

19700

20000

20000

Prepaid rental account 31/12/08 Rental 300 31/12/08 Bal. c/d 300

300

300

ILLUSTRATION 2- Prepaid Expenses

Extract Income Statement:

Income Statement for the year ended 31/12/2008(RM) Gross profit XXXX Less: Expenses Rent 19,700 Extract Balance Sheet: Balance Sheet as at 31/12/2008 (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 31/12/08, the commission earned by the business but not yet received amounted to RM 5,000. Answer: Journal entry: 31/12/08 Dr. Accrued Commission ReceivedRM5000 Cr. Commission Received RM5000

ILLUSTRATION 3- Accrued revenue

Ledger Entry:
Commission Received account 31/12/08 Income Statement 5000 31/12/08 Acc.Com.Rec. 5000

5000

5000

Accrued Commission Received account

31/12/08

Comm.Received

5000

31/12/08

Bal. c/d

5000

5000

5000

ILLUSTRATION 3- Accrued Revenues

Extract Income Statement:

Income Statement for the year ended 31/12/2008(RM) Gross profit XXXX Add: Revenues Commission Received 5,000 Extract Balance Sheet: Balance Sheet as at 31/12/2008 (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 2008 for accounting period ended 31/12/08. Answer: Only 10 months rent should be received/earned for the year ended 2008, another 2 months is prepaid rent revenue. Journal entry: 31/12/08 Dr. Rent Revenue RM2000 Cr. Prepaid Rent Revenue RM2000

ILLUSTRATION 4- Prepaid revenue

Ledger Entry:
Rent Revenue account 31/12/08 Prepaid Rent Rev. 2000 31/12/08 Bank 12000

Income Statement

10000

12000

12000

Prepaid Rent Revenue account

31/12/08

Bal. c/d

2000

31/12/08

Rent Revenue

2000

2000

2000

ILLUSTRATION 4- Prepaid Revenues

Extract Income Statement:

Income Statement for the year ended 31/12/2008(RM) Gross profit XXXX Add: Revenues Rent Revenue 10,000 Extract Balance Sheet: Balance Sheet as at 31/12/2008 (RM) Current Liabilities Prepaid Rent Revenue 2,000