ACCT6174 - Introduction to

Financial Accounting
Week 2 - Adjusting Entries
 Objectives
• Time period assumption.
• Explain the accrual basis of accounting.
• Explain the reasons for adjusting entries.
• Identify the major types of adjusting entries.
• Prepare adjusting entries for deferrals.
• Prepare adjusting entries for accruals.
 Time Period Assumption
Accountant divide business period into artificial time period
• Monthly
• Quarterly
• Semi Annual
• Annually
 Timing Issues
• Fiscal year : accounting time period that is one year in length.
• Calendar year : 1 January – 31 December
• Fiscal year not always = Calendar year
• E.g. Fiscal year for Australia’s Company : 1 July – 30 June
 Accrual Basis
• In accrual basis, transactions recorded in the periods in which the
events occur
• For revenue : recognized when the services are performed,
rather than when cash is received.
• For expense : recognized when incurred, rather than when paid.
• Accrual basis in accordance with IFRS
 Cash Basis
• In cash basis, transactions recorded in the periods in which
cash is affected
• Revenues recognized when cash is received.
• Expenses recognized when cash is paid
 Revenues and Expenses
Revenue recognized in the accounting period in which
the performance obligation is satisfied.

Match expenses with revenues in the period when the

company makes efforts to generate those revenues.
 Adjusting Entries
• The purpose is to ensure that the revenue and expense are accordance to
revenue and expense recognition principles.

• Trial balance may not contain up-to-date and complete data, therefore need to be
adjusted.

• Required every time a company prepares financial statements.

• Will include one income statement account and one statement of financial position
account in the adjusting entries.
 Adjusting Entries
Two types of adjusting entries:

Deferrals: Accruals:
1. Prepaid Expenses. 1. Accrued Revenues.
Expenses paid in cash Revenues for services
before they are used or performed but not yet
consumed. received in cash or
2. Unearned Revenues. recorded.
Cash received before 2. Accrued Expenses.
services are performed. Expenses incurred but
not yet paid in cash or
recorded.
 Deferrals
• It can be prepaid expenses or unearned revenues
Prepaid Expenses
Payment of cash, that is recorded as an asset because service or
benefit will be received in the future.
Examples:
Prepaid insurance, prepaid rent, supplies, advertising, building,
equipment.
 Deferrals
• Adjusting entry:
Increase or Dr. expense account and
Decrease or Cr. asset account
Example:
Sun Co. purchased supplies costing $ 5,000 on March 1. Sun Co.
recorded the payment by increasing (debiting) the asset Supplies.
On March 31 reveals that $2,000 of supplies are still on hand.

Adjusting entry:
Dr. Supplies expense 3,000
Cr. Supplies 3,000
 Deferrals
Depreciation
To allocate a portion of the asset’s cost as an expense during
each period of the asset’s useful life
Examples:
Building, equipment, vehicles.
 Deferrals
Depreciation
To allocate a portion of the asset’s cost as an expense during
each period of the asset’s useful life. And also to express the
actual change in value of the asset.
Examples:
Building, equipment, vehicles.
 Deferrals
Example:
Sun Co. assumes that depreciation on the equipment is $1,200
a year, or $100 per month.

Adjusting entry (at the end of every month):

Dr. Depreciation Expense 100
Cr. Accm. Depreciation – Equipment 100
 Deferrals
Unearned Revenue
Receipt of cash that is recorded as a liability because service
has not be performed.
Example:
Rent, airline tickets, magazine subscriptions.
Adjusting needed to record the revenue for services performed
and to show the liability that remains.
 Deferrals
Adjusting entry will be:
decrease or debit to a liability account increase or credit to a
revenue account
Example:
Sun Co. received $2,400 on October 1 from Moon Co. for
services expected to be completed by December 31. Adjusting
entry:
31 Oct: Dr. Unearned Revenue 800
Cr. Service Revenue 800
 Deferrals
Summary for deferrals transactions :
 Accruals

Adjusting entries for accrual

transactions to record revenues for
services performed or expenses incurred in the
current accounting period that have not been
recognized through daily entries.
 Accruals
Accrued Revenues
Services has been performed but not yet received in cash or
recorded.
Example:
Rent, service performed, interest
Adjusting needed to show the receivable that exists and
records the revenues for services performed.
 Accruals
Adjusting entry will be:
Increases or debits an asset account and
Increases or credits a revenue account
Example:
In October Sun Co. recognized $500 for services
performed but not recorded.
Adjusting entry: Dr. Account receivable 500
Cr. Service Revenue 500
 Accruals

Accrued Expenses
➢Expenses incurred but not yet paid in cash or
recorded. Example: Rent, interest, taxes
➢Adjusting needed to show the obligation and
recognizes the expense.
➢Adjusting entry will be:
• Increases or debits an expense account and
• Increases or credits a liability account
 Accruals
Example:
Sun Co. signed a three-month note payable of
$10,000 on October 1. Interest at an annual rate of
12%. Adjusting entry on Oct 31:
Dr. Interest Expense 100
Cr. Interest Payable 100
 Accruals

Summary for
accruals
transaction:
 Adjusted Trial Balance
• All adjusting entries are journalized and posted.

• Adjusted trial balance is to prove the equality of debit balances and

credit balances in the ledger.

• The basis for the preparation of financial statements.

 Preparing Financial Statements
• Companies can prepare
financial statements directly
from the adjusted trial
balance.
 Preparing Financial Statements
• Companies can prepare
financial statements directly
from the adjusted trial balance.
 Reference
Weygandt J., Kimmel P., Kieso D. Financial Accounting IFRS Edition. 04.
John Wiley & Sons (Asia). 2019
Thank You