ADJUSTMENTS FOR ACCRUALS & PREPAYMENTS

students are able to: Make adjustments for accrued and prepaid expenses Make adjustments for revenues owing and unearned revenues Determine the actual amount of expenses and revenues in the income statement Show the recording of accruals and prepayments in the balance sheet 2 • • • • .LEARNING OUTCOMES At the end of the session.

the trial balance may not contain up-to-date and complete financial statements data.INTRODUCTION • Financial statements are prepared from the trial balance. • However. 3 . • Trial balance are balances from the ledger books. whereby only expenses paid and revenues received were recorded.

INTRODUCTION (con’t) • Adjusting entries are needed at the end of accounting period. • Reasons: – to get correct net profit figure for the period – as to comply the matching concept 4 . • As to ensure that revenues are recorded in the period in which they are earned and expenses are recognized in the period in which they are incurred.

•Prepaid expenses / extra payment of expenses will be treated as current asset.790 Additional information as of 31/3/2010: •Rent and insurance prepaid RM150. 5 . •Example: Trial Balance as at 31/3/2010 (extract) DR CR Rent and insurance 1.PREPAID EXPENSES •Payments of expenses that will benefit more than 12 months period.

150 Prepayments will decrease year-end balance.WORKED EXAMPLE EXPENSES YEAR-END BALANCES 1.790 ADJUSTMENT ACTUAL EXPENSES FOR THE PERIOD 1.640 RM Operating expenses Rent and insurance Balance Sheet as at 31/3/2010 (extract) RM Current Assets Prepaid rent and insurance 150 6 RM RM . Income statement for the year ended 31/3/2010 (extract) RM RM 1.640 Rent and insurance .

•Accrued expenses/expenses still owing will be treated as current liabilities.ACCRUED EXPENSES •Expenses incurred in the accounting period but payment has not been made. 7 . •Example: Trial Balance as at 31/3/2010 (extract) DR CR Wages and salaries 8.980 Additional information as of 31/3/2010: •Wages and salaries accrued/outstanding RM210.

190 RM Operating expenses Wages and salaries Balance Sheet as at 31/3/2010 (extract) RM Current Liabilities Accrued wages and salaries 210 8 RM RM .980 ADJUSTMENT ACTUAL EXPENSES FOR THE PERIOD 9. Income statement for the year ended 31/3/2010 (extract) RM RM 9.190 Wages and salaries + 210 Accruals will increase year-end balance.WORKED EXAMPLE EXPENSES YEAR-END BALANCES 8.

9 .REVENUES RECEIVED IN ADVANCE (UNEARNED REVENUES) •Payment received for services to be provided in a future accounting period. •Example: Trial Balance as at 31/3/2010 (extract) DR Rent received CR 650 Additional information as of 31/3/2010: •Rent was received in advance RM50. •Revenues received in advance will be treated as current liabilities.

50 Prepayments will decrease year-end balance. Income statement for the year ended 31/3/2010 (extract) RM RM 600 RM Other revenues Rent received Balance Sheet as at 31/3/2010 (extract) RM Current Liabilities Rent received in advance 50 10 RM RM .WORKED EXAMPLE REVENUES YEAR-END BALANCES 650 ADJUSTMENT ACTUAL REVENUES FOR THE PERIOD 600 Rent received .

100 Additional information as of 31/3/2010: •Commission revenues still accrued RM100. •Example: Trial Balance as at 31/3/2010 (extract) DR CR Commission received 1. •Accrued revenues will be treated as current assets.ACCRUED REVENUES •Revenues earned from services that have been performed but payment not yet received. 11 .

Income statement for the year ended 31/3/2010 (extract) RM RM 1.100 ADJUSTMENT ACTUAL REVENUES FOR THE PERIOD 1.200 RM Other revenues Commission received Balance Sheet as at 31/3/2010 (extract) RM Current Assets Accrued commission received 100 12 RM RM .WORKED EXAMPLE REVENUES YEAR-END BALANCES 1.200 Commission received + 100 Accruals will increase year-end balance.

JOURNAL ENTRIES TRANSACTION a b c d e To record payment of expenses To record prepaid expenses To record accrued expenses To record received from revenue To record revenue received in advance DR Expenses Prepaid expenses Expenses Cash/bank Revenue CR Cash/bank Expenses Accrued expenses Revenue Revenue received in advance f To record accrued revenue Accrued revenue Revenue 13 .

SUMMARY •Year-end adjustments on income statement: PREPAYMENTS ACCRUALS •Effect on the balance sheet: CURRENT ASSETS Prepaid expenses Accrued revenues + CURRENT LIABILITIES Accrued expenses Revenues received in advance 14 .