Management Accounting I

July 2021
BMJ Term 1
Tuesday
(6 - 7pm)
debarati@xlri.ac.in
Why the complexity?

It’s “ACCRUAL”
world!
 Measuring Income
• Recognizing economic events as they occur, regardless of when cash is exchanged
 Accrual accounting! (vs Cash System of Accounting)

• Revenue recognition / realization principle

 Conditional sales? Instalment sales? Subscriptions? Franchises? Long term projects?

• Expense recognition: matching principle; assigned to the period in which incurred

 Selling on credit? Warranty?

• Timing differences; Adjusting accounts

 More complex and expensive; but more
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 Timing Differences
• Accrued Revenue: Revenue is recognized before cash is received Unbilled services

• Accrued Expense: Expense is recognized before cash is paid Salaries Payable

• Deferred Revenue: Revenue is recognized after cash is received Unearned Revenue

• Deferred Expense: Expense is recognized after cash is paid Prepaid Rent

• Accruals vs Deferrals!
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 Step 5: Adjustments
• Journal entries prepared at the end of the period to ensure

 Revenues recognized when earned

 Expenses recognized when incurred

• Affects a Balance Sheet item (assets or liabilities) and a P&L Account item (revenues
or expenses)

• Does not affect cash!

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 Example 1
• Transaction: Rent for whole year paid upfront 24,000 Actual outflow

• Current effect: Prepaid rent (asset) increases 24,000; Cash (asset) decreases 24,000

• Actual monthly rent: 24,000 / 12 = 2,000 per month Actual expense

• End of the month effect:

 Rent expense (expense) increases 2,000; Adjusting entry!

 Prepaid rent (asset) decreases 2,000

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 Example 2
• Transaction: Office supplies purchased with 30,000 cash Actual outflow

• Current effect: Office supplies (asset) increases 30,000; Cash (asset) decreases 30,000

• Month end stock 23,000 Actual expense

Used 7000

• End of the month effect:

 Office supplies expense (expense) increases 7,000;

Adjusting entry!
 Office supplies (asset) decreases 7,000

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 Example 3
• Transaction: Purchased truck for 1,20,000; paid half in cash Actual outflow

• Current effect: Truck (asset) increases 1,20,000; Cash (asset) decreases 60,000; Truck
Payable (liability) increases 60,000
Actual expense
• Monthly depreciation: 1,20,000 / (10*12) = 1,000 assuming 10 year life

• End of the month effect:

Adjusting entry!
 Depreciation expense (expense) increases 1,000;
 Accumulated Depreciation - Truck (contra-asset) increases 1,000
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 Example 4
• Transaction: Received advances from customer 15,000 Actual inflow

• Current effect: Unearned revenue (liability) increases 15,000; Cash (asset) increases
15,000

• Services worth 6,000 rendered this month Actual revenue earned

• End of the month effect:

Adjusting entry!
 Unearned revenue (liability) decreases 6,000;
 Revenue from services (revenue) increases 6,000
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 Steps 6, 7, 8 and 9
• 6: Prepare an Adjusted Trial Balance

• 7: Prepare Financial Statements

 Temporary or Nominal accounts: Transfer balances to P&L Account; Transfer out

balance to Retained Earnings
 Permanent or Real accounts: Transfer balances to Balance Sheet

• 8: Prepare a post-closing Trial Balance

• 9: Carry forward balances to next period

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 ABC Ltd. Trial Balance as on 31st March 2020 • Insurance of 80 expired in March
Cash 4,320
• Office supplies in hand on 31st March 150
Accounts Receivable 2,500
• March depreciation 200
Office Supplies 360
• Accrued wages of 240 on 31st March
Prepaid Insurance 480
Office Equipment 6,800
• Revenue from services earned but not billed
during March 600
Accumulated Depreciation – Off. Equip 1,200
Accounts Payable 1,400
• Performance of services paid for in advance
320
Unearned Revenue 920
• Estimated income taxes for March 500
Share Capital 4,000
Retained Earnings 5,740 • Prepare
Dividends 800
 T accounts with opening balances
Service Revenue 5,800
 Adjusting entries
Wages Expense 3,000
 Adjusted Trial Balance
 P/L Account and Balance Sheet
Rent Expense 800
 Statement of Retained Earnings
19,060 19,060Basu, XLRI
 Problems Discussion
• 4.1

• 4.7

• 4.11

• 4.14

• 4.16

• 4.20
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 The rest…

in a while,
Questions for Next Class
3.11

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3.11 contd

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4.1

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4.1 contd

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4.8

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4.8 contd

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4.20

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4.20 contd

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