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. . - PowerPoint PPT Presentation

Transcript of Balance Day Adjustments

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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 - 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.

– 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!

Scenario 1

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Let us help him.

– 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.

End of accounting period – December 2000

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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.

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Balance Day Adjustments - Accrued Expenses

Yes…. Credit entry because it is a liability

(still owe people $)

What is the nature of accrued

expense?Debit or Credit

entry?

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JOURNAL Date Particulars Debit CreditYear 2000Dec 31 $12 000 $12 000

Rent Expense Profit and Loss a/c

Using Phua CK as an example.

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

However, this is not the case. An additional ledger needs to

be created – Accrued Rent Expense

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RENT EXPENSES a/c Year 2000 Dec 31 Bank $5 000

Year 2000 Dec 31 Profit & Loss $12 000

Bal c/d $7 000

JOURNAL Date Particulars Debit CreditYear 2000 $7 000Dec 31 $7 000

Rent Expense Rent Expense (Accrued)

Year 2001 Jan 1 Bal b/d $7 000

$12 000 $12 000

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Profit & Loss Account 2000 Dec 31 Expenses $12 000

Balance Sheet as at Dec 2000 Liability

Accrued Rent Expense $7 000

JOURNAL

Profit & Loss a/c $12 000 Rent Expense $12 000

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

Date Particulars Debit Credit 2000Dec 31

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• Definition• Credit/Debit nature?• Is there a need to open another

ledger for accrued expense?• Post this ledger to P/L or Balance

Sheet?

Summary

Balance Day Adjustments - Accrued Expenses

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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.

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

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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

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Accrued Revenue/Outstanding Revenue– Should have received : $ 12 000– Only received : $ 5 000– Outstanding revenue : $ 7 000

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

End of accounting period – December 2000

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Accrued Revenue/Outstanding Revenue

$ 5 000 received

$7 000 owing

31 Dec 2000

$12 000 earned

1 Jan 2000 31 May 2000

JOURNAL

Rent Revenue (Accrued) Rent Revenue

Date Particulars Debit CreditYear 2000 $7 000Dec 31 $7 000

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RENT REVENUE a/c Year 2000 Dec 31 Bank $5 000Year 2000

Dec 31 Profit & Loss $12 000 31 Bal c/d $7 000

$12 000 $12 000

Accrued Revenue/Outstanding Revenue

Year 2001 Jan 1 Bal b/d $7 000

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PROFIT AND LOSS a/c Year 2000 Dec 31 Rent $12 000 Revenue

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BALANCE SHEET AS AT 31 DEC 2000 Current AssetAccrued Revenue $7 000

RENT REVENUE a/c Year 2000 Dec 31 Bank $5 000Year 2000

Dec 31 Profit & Loss $12 000 31 Bal c/d $7 000

$12 000 $12 000Year 2001 Jan 1 Bal b/d $7 000

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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

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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.

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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.

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Prepaid Expense/Payment in Advance

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

Definition

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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.

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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

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Prepaid Expense/Payment in Advance

$ 12 000 incurred $6 000 prepaid

30 June 2002

$18 000 paid

1 Jan 2001 31 Dec 2001

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.

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RENT EXPENSES a/c Year 2001 Dec 31 Bank $18 000

Year 2001 Dec 31 Balance c/d $ 6 000

Profit & Loss $12 000

JOURNAL

Year 2001 $6 000Dec 31 $6 000

Rent Expense (Prepaid) Rent Expense

Year 2002 Jan 1 Bal b/d $6 000

$18 000 $18 000

Date Particulars Debit Credit

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Profit & Loss Account 2001 Dec 31 Expenses $12 000

Balance Sheet as at Dec 2001 Current Assets

Prepaid Rent Expense $6 000

• Definition• Credit/Debit nature?• What are the differences in adjustments

between the accrued and prepaid expenses?

Summary

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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 Adjustments

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Received : $500 x 2 (Two month’s

salary)= $1 000

Earned : $500Paid in advance : $500

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

Balance Day Adjustments

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Prepaid Revenue/ Outstanding Revenue

DEFINITIONAre 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.

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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

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$ 12 000 earned $6 000 in advance$18 000

receivedJOURNAL

Prepaid Rent Expense Rent Expense

Date Particulars Debit CreditYear 2001 $6 000Dec 31 $6 000

31 June 20021 Jan 2001 31 Dec 2001

Prepaid Revenue/ Outstanding Revenue

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RENT REVENUE a/c Year 2001 Dec 31 Bank $18 000Year 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 Revenue

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Current LiabilitiesPrepaid Revenue $6 000

PREPAID RENT REVENUE a/c Year 2001 Dec 31 Bal c/d $6 000

Year 2001Dec 31

$6 000 $6 000Year 2002 Jan 1 Bal b/d $6 000

Rent Revenue $6 000

BALANCE SHEET AS AT 31 DEC 2001

Prepaid Revenue/ Outstanding Revenue

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Balance Day Adjustments - Prepaid Revenue

• Definition • Nature of the entry• Distinguish the differences in

adjustments between accrued revenues and prepaid revenues

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Practice - Accrued and Prepaid Revenues

Trial Balance as at 31 August 2001Particulars Debit Credit

$ $Rent 1 500

Commission 7 000Adjustments

1)$300 of the rent revenue was received in advance.

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

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Practice - Accrued and Prepaid Revenues

JOURNAL Particulars Debit

Credit$ $1 Rent Revenue 300

Prepaid Rent Revenue 300

(Being amount of revenue received in advance)

2 Accrued Commission Revenue 1 400 Commission Revenue 1

400(Being revenue earned but not yet

received)

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Rent Revenue

Prepaid Rent Revenue

Profit & Loss for the year ended 31 Aug 2001

Prepaid Rent Revenue

Balance Sheet as at 31 Aug 2001 Current Liability Prepaid Rent Rev 300

Rent Revenue 1 200 $ $

$ $

$

$ $

$

Rent Revenue 300Bal c/d 300

Cash at Bank 1 500Prepaid Rent Rev 300Profit & Loss 1 200

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Commission Revenue

Accrued Commission Revenue

Profit & Loss for the year ended 31 Aug 2001

Accrued Commission Revenue

Balance Sheet as at 31 Aug 2001 Current Asset Accrued Comm Rev 1 400

Rent Revenue 8 400 $ $

$ $

$

$ $

$

Rent Revenue 1 400 Bal c/d 1 400

Cash at Bank 7 000Accrued Comm Rev 1 400

Profit & Loss 8 400

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Conclusion

Accrued Expenses

Prepaid Expenses

Accrued Revenues

Prepaid Revenues

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

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

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

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

Credit Entry

Debit Entry

Debit Entry

Credit Entry

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Conclusion

Accrued Expenses

Prepaid Expenses

Accrued Revenues

Prepaid Revenues

Dr Expense A/CCr Accrued Expense A/C

Dr Prepaid Expense A/CCr Expense A/C

Dr Accrued Revenue A/CCr Revenue A/C

Dr Revenue A/CCr Prepaid Revenue A/C

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Conclusion

Accrued Expenses

Prepaid Expenses

Accrued Revenues

Prepaid Revenues

Current Liability

Current Assets

Current Assets

Current Liability

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• 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 actual amount of the expenses incurred for the year of 2001.

Practice - Accrued and Prepaid Expenses

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Maintenance Expense

Prepaid Maintenance Expense

$ $Cash at Bank 900

Prepaid Maint Exp 400Profit & Loss 500

900 900

2

Selling Expense

Accrued Selling Expense

$ $Cash at Bank 1 200Accrued Selling Exp 300

Profit & Loss 1 500

1 500 1 500

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