CHAPTER 14 Accrual accounting

and balance day adjustments

Learning outcome
To be able to prepare four special journals
from source documents and information
supplied

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-1
KEY TERMS
• Accrual accounting
• Accrued expenses
• Accrued revenue
• Balance date
• Balance day adjustments
• Cash accounting
• Closing inventories

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-2
KEY TERMS cont.
• Doubtful debts
• Prepaid expenses
• Provisions for annual leave and long-service leave
• Provision for doubtful debts
• Revenue in advance
• Reversing general journal entries

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-3
CASH ACCOUNTING
Transactions are recorded, and cash
accounted for, when received and paid

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
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ACCRUAL ACCOUNTING
• Transactions are accounted for when revenue
is earned and expenses incurred
• Balance day adjustments apply to the accrual
system

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-5
BALANCE DAY ADJUSTMENTS
• Adjustments are made to:
– incomes/revenues
– expenses
• Adjustments ensure that profit is calculated by
matching expenses to revenue earned in profit
period

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-6
TYPES OF BALANCE DAY
ADJUSTMENTS
• Accrued expenses
– Expense incurred but not yet paid
• Accrued revenue
– Revenue earned but not yet received

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-7
TYPES OF BALANCE DAY
ADJUSTMENTS cont.
• Revenue in advance
– Revenue already received but relates to next
financial year
• Prepaid expenses
– Expenses paid in advance for next accounting
period

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-8
ACCRUED EXPENSES
• Example
– Wages earned by employees but not paid in current
period
• Treatment
– Increase (debit) wage expense and create a liability
to pay (accrued wages)

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-9
ACCRUED EXPENSES cont.

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-10
ACCRUED REVENUE
• Example
– Commission earned by business but not received by end
of current period
• Treatment
– Increase revenue (credit) and create an asset (accrued
revenue)

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-11
ACCRUED REVENUE cont.

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-12
REVENUE IN ADVANCE
• Example
– Deposit taken for work scheduled to start in next period
• Treatment
– Decrease (debit) revenue and create a liability (revenue
in advance)

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-13
ACCRUED REVENUE cont.

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-14
REVENUE IN ADVANCE cont.

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-15
PREPAID EXPENSES
• Example
– Insurance paid for 12 months in August, $1000 of which
relates to the next financial year
• Treatment
– Reduce insurance expense (credit) and create an asset
(prepaid expense)

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-16
PREPAID EXPENSES cont.

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-17
PREPAID EXPENSES cont.

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-18
BALANCE SHEET AND
BALANCE DAY ADJUSTMENTS

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-19
REVERSING ENTRIES
• Reversal of original general journal entry
transfers adjustment to next accounting
period

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-20
REVERSING ENTRIES cont.
The reversing general journal entries are as
follows:

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-21
OTHER BALANCE DAY ENTRIES
• Closing inventories
• Depreciation
• Bad debts
• Doubtful debts
• Provision for annual leave
• Provision for long-service leave
• Adjustments for errors—not really a balance day entry

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-22
OTHER BALANCE DAY ENTRIES
cont.
• Closing inventories (periodic system)
─ Record on balance sheet
• Depreciation expense
─ Record depreciation for period
• Bad debts
─ Debtor’s accounts that are ‘uncollectable’

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-23
OTHER BALANCE DAY ENTRIES
cont.
• Doubtful debts
─ Estimate of debtors who will not pay
• Annual leave provision
– Employee has not yet taken leave entitlement
• Long-service leave provision
– Accrues for employees’ service period

PPTs to accompany Accounting and Bookkeeping Principles and Practice by AAT & David Willis
 2011 McGraw-Hill Australia Pty Ltd 14-24