ACC1006/1106 TEST 2: WORKSHOP 2

ADJUSTMENTS
These are done at year end only.

Compare where the transaction has been recorded, identify what is incorrect according to
IFRS principles and do the ADJUSTING journal entry.

Adjusting journal entries (like all journal entries) can be shown in the form of a general
ledger.

General steps to processing adjustments.

1. How was the transaction recorded initially?

2. Is the information sitting in the correct account according to IFRS principles?
3. Process the adjusting journal entry.

Common adjustments to consider:

1. Prepaid expenses
2. Accrued expenses
3. Income received in advance
4. Accrued income

PREPAID EXPENSES

- expenses that the company has paid in advance (i.e., Before they have been
incurred)
- the person you have paid still owes you the good/service you have paid for/refund
the money; therefore, prepaid expenses is an ASSET account.

Example 1:
Pilgrim (Ltd) rents out a building for R10 000 a month. They paid R130 000 at the beginning
of the year. The accountant recognizes cash payments for rent as an expense.
1. What is the rent expense for the year?
2. Process the adjusting journal entry.

ACCRUED EXPENSES

- expenses that have been incurred but not yet paid for.
- the amount is still owed to the person you received the benefit of the expense from,
therefore accrued expense is a LIABILITY account.

Example 2:

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Pilgrim (Ltd) paid for electricity pf R500 at the beginning of the year as they expected to only
use this amount. At the end of the year, they realized that they had used R900 worth of
electricity. Pilgrim has an agreement with Eksom (the power provider) that they can either
pay for electricity upfront or incur the expense and pay at the end of the period.
1. What is the expense for the year?
2. Process the adjusting journal entry.

INCOME RECEIVED IN ADVANCE

- Money that has been received before you have fulfilled your part of the transaction
that creates an income (i.e. The income has not been earned, but cash has been
received)
- You still owe the person who paid you either their good/service they have paid you
for or refund the money paid to you, therefore income received in advance is a
LIABILITY account.

Example 3:
A customer paid R3500 for shoes that were not in stock on 1 December 2021. The shoes will
be delivered to the customer on 5 January 2022. The bookkeeper recorded the payments as
sales income. The business has a 31 December year end.

1. What is the income earned on this transaction on 31 December 2021?

2. Process the adjusting journal entry.
3. How would the general ledger be updated?

REVERSAL OF ADJUSTMENTS
Adjustments are reversed at the beginning of the financial year after the adjustment was
made.

This is the exact opposite of the adjusting journal entry.

CLOSING ENTRIES

There are done at year end after adjustments.

1. Income and expenses are closed off to the profit and loss account which is then
closed off to Retained Earnings.
2. Drawings are also closed off to your retained earnings

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ACCOUNTING SYSTEM AND TRIAL BALANCES

PROPERTY, PLANT AND EQUITPMENT

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These are assets the business uses to operate. These are expected to be used for more than
12 months, therefore are NON-CURRENT ASSETS.

Eg. buildings, vehicles, manufacturing machines, land etc.

DEPRECIATION
- Depreciation is a systematic allocation of the depreciable amount of an asset over its
estimated useful life
- This is an expense account.

Each item has an estimated useful life.

- Depreciable amount = cost less residual value

Residual value = amount the asset can we sold for at the end of its useful life less costs to
Sell

Example 4:
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IMPAIRMENT
-revaluation model vs cost model.

BAD DEBTS and ALLOWANCE FOR DOUBTFUL DEBTS

This decreases the trade receivables balance on the face of the SOFP.