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Chapter 5 (1) - Accruals and Prepayments
Chapter 5 (1) - Accruals and Prepayments
PREPARATION OF POST
ADJUSTED FINANCIAL
STATEMENTS
(Accruals and Prepayments)
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Learning Objectives
• To distinguish between the cash basis and accrual
basis of accounting
• To explain why the adjusting entries are needed
• To record adjusting entries for accruals and
prepayments
• To prepare the financial statements after the
adjustments were considered
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ADJUSTING ENTRIES
• The financial statements that had been dealt
with so far have not taken into account year
end adjustments that must be made by the
business.
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ADJUSTING ENTRIES
• Those adjustments include:
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Prepayments and Accruals
• Revenues and expenditures are categorized as
NOMINAL account.
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• In preparing the financial statement there
are some generally accepted accounting
concepts that must be applied.
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Periodicity Concept
• The most important task in accounting is the
provision of information on a firm’s profitability
through the preparation of financial statements.
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Actg. period Actg. period
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• Accounting period is normally made up of 12
months.
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Matching Concept
• In an accounting period, the Profit or loss is
determined by comparing or matching total
revenues earned against expenditures
incurred for a particular accounting year.
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Accrual Concept
Revenues earned
Revenues is said to have been earned when the
business transaction has taken place regardless of
whether cash has been received.
Expenses incurred
Expenses is said to have been incurred when the
business transaction has taken place regardless of
whether cash has been paid.
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• Requirement of the three accounting concepts raises a
number of issues relating to reporting & recording of
revenues and expenses.
Prepayments Accruals
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Prepaid Expenses
• Prepaid expenses are those expenses which belong
to the subsequent accounting period but somehow
is paid in advance in the current period.
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Journal entries for prepaid
expenses
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Illustration 1
The accounting year end of Megan
Enterprise is on every 31 December. On 1
April 2010, the firm purchased an insurance
policy for a year and the coverage took
effect on the same day. The insurance
premium that Megan Enterprise paid was
RM1,000.
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Current Actg. Subsequent
period Actg. period
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Current Actg. period
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Solution
From accounting point of view, the
Insurance expense that Megan Enterprise
should report for the year ended 31
December 2010 is:
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Insurance Expense
==== ====
DR Revenue account
CR Prepaid Revenue account
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Illustration 2
The accounting year end of Megan
Enterprise is on every 31 December. On 1
April 2012, the firm rented out part on its
building for RM100 per month. On the
same day the tenant paid a sum of RM1,200
for a one-year rental.
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Solution
From accounting point of view, the Rent
Revenue that Megan Enterprise should
report for the year ended 31 December 2012
is:
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Rent Revenue
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Accrued Expenses
• Accrued expenses are those expenses incurred in
the current accounting period but has not been
paid yet.
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Journal entries for accrued
expenses
DR Expense account
CR Accrued Expense account
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Illustration 3
The accounting year end of Megan
Enterprise is on every 31 December. On 1
April 2011, the firm rented a building for
RM200 per month. For the period up to 31
December 2011, Megan Enterprise had only
paid rent for April to November only.
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Solution
From accounting point of view, the Rent
Expense that Megan Enterprise should
report for the year ended 31 December 2011
is:
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Rent Expense
===== ====
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Accrued Revenues
• Accrued revenues are those revenues incurred in the
current accounting period but have not been received
yet.
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Journal entries for accrued
revenues
CR Revenue account
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Illustration 4
The accounting year end of Megan
Enterprise is on every 31 December. On 1
April 2011, the firm rented a building for
RM200 per month. For the period up to 31
December 2011, Megan Enterprise had only
received rent for April to November only.
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Rent Revenue
===== ====
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Accrued Revenues
• NOTICE that the Accrued Rent Revenue account does
not have a balance on 31 December 2011.
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