ADJUSTING

ENTRIES
TOPIC 5.2
 MATCHING CONCEPT
• Profit for a period is determined by comparing (matching) all the revenues
earned during that period with all the expenses incurred in earning those
revenues for that same period.
• Normally , a bookkeeper will record:
1. All the revenue items as they earned and received by the firm
2. All the expense items as they are incurred and paid.

HOWEVER!!!!!
There are some expense items that has been :
1. paid in advance and should not appear in the current period’s
account -→ PREPAID EXPENSE
2. incurred but not yet paid and therefore not recorded in the current
period-→ ACCRUED EXPENSE

There are some revenue items which :

1. Earned but not yet received and therefore not yet recorded in the
current period. → ACCRUED REVENUE
2. Have been received and recorded as revenue but which have not
yet been earned for that period.→ PREPAID REVENUE

THEREFORE…
• Your Action ?
Need to update our books .

• Why?
More accurate profit figure

• How?
Do adjusting entries (balance-day adjustment)

- journal entries made at the end of an accounting period in order to determined the correct
revenues earned and the correct expenses incurred for an accounting period.
 ACRRUED EXPENSES
❑Expenses which have already been incurred but not paid yet.
❑Shown as current liabilities in the Statement of Financial Position:
Journal entries to record accrued expenses
Dr. Expense account (SOCI) xxxxx
Cr. Accrued expense account (SOFP) xxxxx

❑Example: Shera Ltd paid the telephone bill on the 15th of the following month. For the month of
December 2011, the bill amounted to RM2,000. The total telephone bill from January to November
2011 of RM22,000 was paid by cheque. Determine the amount to be recorded in the statement of
comprehensive income for the year ended 31st December 2011.
 Solution
Amount shown on the SOFP
Telephone bill Jan – Nov RM22,000
Telephone bill unpaid 2,000
Total 24,000

LEDGER ENTRIES
Telephone Expense Account
Bank 22,000
Accrued expense 2,000 SOFP 24,000

Accrued Expense Account

Balance c/d 2,000 Telephone expense 2,000
 Financial Statements Extract
Statement of Comprehensive Income for the year ended 31 December 2011

Administrative expense:
Telephone expense 24,000

Statement of Financial Position as at 31 December 2011

Current liability:
Accrued telephone expense 2,000
 Exercise 1
The trial balance of Nadia Sdn Bhd contains the following balances:
Rent RM400
Wages RM5,200
At the end of the accounting period, rent amounting to RM200 remained owing
and wages of RM400 were accrued to the operating workers.
Show the ledger account for rent and wages and their adjustments.
 ACCRUED REVENUES
❑Income earned but not yet received.

❑Shown as current assets on the SOFP:

Journal entries to record accrued revenue
Dr. Accrued revenue xxx
Cr. Revenue xxx

❑EXAMPLE: Nataliya Ltd sublets part of the building to Hafis at RM400 per month. Rent received from
Hafis for 11 months ended 30 November 2011 amounted to RM4,400. On 31st December 2011, the
rent of RM400 for the month of December has not been received.

Calculate the amount to be transferred to Statement of Comprehensive Income.

 Solution
Amount shown on the SOCI
Rent received – Jan – Nov RM 4,400
Rent income accrued – Dec 400
Total 4,800

LEDGER ENTERIES
Rent income account
SOCI 4,800 Bank 4,400
Accrued income 400

Accrued income account

Rent income 400 Balance c/d 400
 Financial Statements Extract
Statement of Comprehensive Income for the year ended 31 December 2009
Other operating income:
Rent income 4,800

Statement of Financial Position as at 31 December 2009

Current asset:
Accrued rent income 400
 Exercise 2
Following are the balances extracted from the ledger of Faridah Trading as at 31st
July 2010.
Credit (RM)
Interest revenue 3,800
Rent revenue 6,500
Note:
i. Interest of RM400 and rent revenue of RM500 was earned but not yet received.
Show the relevant ledger accounts to record the above adjustments.
 PREPAID EXPENSES
❑Expenses paid in advance but the benefits will be received in the future accounting period.

❑Appear under Current assets in the SOFP:

Journal entries
Dr. Prepaid expense account xxxx
Cr. Expense account xxxx

❑EXAMPLE: On 1st April 2011, an insurance policy was taken out against fire. This is one-year policy
and a premium of RM2,400 was paid immediately. The accounting year of this company end at 31st
December each year. Determine the insurance cost to be charged to SOCI for the year ended 31st
December 2011.
 Solution
Amount shown on the SOCI
Insurance premium paid for 1 year RM2,400
Prepaid insurance (RM200 x 3months) (600)
Total 1,800

LEDGER ENTERIES
Insurance expense account
Bank 2,400 Prepaid expense 600
SOCI 1,800

Prepaid expense account

Insurance expense 600 Balance c/d 600
 Financial Statements Extract
Statement of Comprehensive Income for the year ended 31 December 2011
Expense:
Insurance expense 1,800

Statement of Financial Position as at 31 December 2011

Current asset:
Prepaid expense 600
 Exercise 3
The following item is taken from Husna Ltd:
Trial Balance as at 31 December 2011
Rent expense RM280

Rent amounted to RM50 is paid in advance for the next accounting period.
Show the ledger balance account of this item.
 PREPAID REVENUES
❑Refers to the revenue received in advance for the services that have not yet been performed.

❑Is a liability and will appear in the SOFP under current liability:
Journal entries
Dr. Revenue xxxx
Cr. Prepaid revenue xxxx

❑EXAMPLE: Yasmin Sdn Bhd sublets part of its premises to Zubaidy Sdn Bhd on 1 January 2009.
The total rent received during the year 2009 amounted to RM4,200, which run up to 28th Feb 2010.
The accounting year end at 31 Dec 2009.

Calculate the amount of rent receivable to be transferred to SOCI for the year ended 31st December
2009 and show the relevant ledger entries.
 Solution
Amount shown on the SOCI
Rent received RM4,200
Prepaid rent revenue (RM300 x 2 months) (600)
Total 3,600

LEDGER ENTERIES
Rent received account
Prepaid income 600 Bank 4,200
SOCI 3,600

Prepaid income account

Balance c/d 600 Rent received 600
FINANCIAL STATEMENTS EXTRACT
Statement of Comprehensive Income for the year ended 31 December 2009
Other income
Rent received 3,600

Statement of Financial Position as at 31 December 2009

Current liability:
Prepaid income 600
Summary