BUSINESS SCHOOL

Introductory Financial Accounting

SEMINAR WEEK 7

Correcting/Adjusting/Reversing Entries
Adjusting Entries

 Not ‘correcting’

 Accruals
• Expenses consumed but not yet paid for

• Income earned but related cash not yet received

 Deferrals
• Expenses paid for but not yet consumed

• Revenue (cash) received but not yet earned

 Other (eg. Depreciation, Amortization, Bad Debt Provisions)

The University of Western Australia

Class Work

1. Explain what each of the following account names

means, and
2. decide which category of element (in the financial
statements) it belongs to:
• Unearned revenue - Accrued dividends
• Prepayments - Accrued sales
• Payments in advance - Accrued expenses
• Deferred revenue - Prepaid expenses
• Accrued income - Salaries payable

The University of Western Australia

Class Work

1. Explain what each of the following account names

means, and
2. decide which category of element (in the financial
statements) it belongs to:
• Unearned revenue L - Accrued dividends A
• Prepayments A - Accrued sales A
• Payments in advance A - Accrued expenses L
• Deferred revenue L - Prepaid expenses A
• Accrued income A - Salaries payable L

The University of Western Australia

Other Adjusting Entries
 Eg. Depreciation
• An expense, recognized systematically, for the purpose of allocating the depreciable amount of a depreciable asset over its useful life.

Amortization: ‘depreciation’ of intangible depreciable assets. Depletion: allocation of the cost of natural resources over time

 Example
Depreciation on Buildings was charged at $70 for the period.
Adjusting Entry
Dr Depreciation Expense 70
Cr Accumulated Depreciation 70

The University of Western Australia

Extended Trial Balance 30 June 2020

Dr Cr Adj Dr Adj Cr Final Dr Final Cr

Cash 325,900 325,900
Inventory 10,000 10,000
Buildings 180,000 180,000
Accumulated 70 70
Depreciation
Prepaid advertising 2,500 292 2,208
Creditors 4,000 4,000
Owners Equity 510,000 510,000
Sales Revenue 8,400 8,400
Cost of goods sold 4,000 4,000
Advertising exp. 292 292
Depreciation exp. 70 70
Total 522,400 522,400 362 362 522,470 522,470
The University of Western Australia
Adjusting entries

 Even though they are recorded in the extended TB, they still
need to be journalised and then posted to the general ledger.

 Often they are identifiable as adjusting entries from their

reference.

The University of Western Australia

Accounting Cycle

 Initial Transaction
 Entering transactions into the General Journal or Special Journal
 Posting to Ledgers
 Preparing a Trial Balance (Unadjusted)
 Entering Adjusting Entries into the General Journal
 Preparing a Trial Balance (Adjusted)
 Preparing Financial Reports [Income Statement, Balance Sheet]

The University of Western Australia

 Correcting Adjusting
Entries Entries

More Accurate
More accurate value of
Profit/Loss calculation
Assets & Liabilities in
in the Income
the Balance Sheet
Statement

The University of Western Australia

Correcting Entries

 Are just separate General Journal entries made to correct errors in

the Accounts

The University of Western Australia

Error in TB example

Amy posted the following journal:

Dr Cash 500
Cr Advertising Expense 500

Extract from her TB (which balances)

Cash Dr $7,900
Advertising Expense Dr $3,000

Journal Entry should have been:

Dr Advertising Expense 500
Cr Cash 500

 What are correct TB balances?

The University of Western Australia
Errors in Example cont’d

 The incorrect Journal Entry has caused –

• Cash to be overstated by $1000
and
• Advertising to be understated by $1,000

To rectify the error in the Accounts we need to:

Dr Advertising Expense $1,000
Cr Cash $1,000

The University of Western Australia

Solution to Error in TB

Correct TB balances should be

Cash Dr $6,900
Advertising Expense Dr $4,000

The University of Western Australia

Types of Adjusting Entries

 Deferrals
• Prepaid Expenses
• Prepaid Revenue (Unearned Revenue)

 Accruals
• Accrued Expenses
• Accrued Revenue (Revenue Receivable)

• Other (Depreciation, Amortisation, Bad Debts, Doubtful Debts,

Revaluation/Devaluation of Asset, Stock Loss, Stock Gain)

The University of Western Australia

Prepaid Expenses

Example (A)
ABC Ltd. Paid on 1/4/2020 $2,400 for insurance for the next 12 months policy.
The Adjusting Entry on 30/6/2020 is required.

Initial Entry on 1/4/2020

Dr XXXXX
Cr XXXXX

The University of Western Australia

 Prepaid Expenses
Example (A)
ABC Ltd. Paid on 1/4/2020 $2,400 for insurance for the next 12 months policy.
The Adjusting Entry on 30/6/2020 is required.

Initial Entry on 1/4/2020

Dr Prepaid Insurance (A) $2,400
Cr Cash (A) $2,400
-.-.-.-.-.-.-.-.-
Adjusting Entry on 30/6/2020
Dr Insurance Expense (Ex) $600
Cr Prepaid Insurance (A) $600
$600
$1,800

3 months 9 months
The University of Western Australia
 Example (B)

Office supplies were purchased on 16/10/2019 for $640.

A stock count on 30/6/2020 revealed $80 were still on hand and not yet used.

Initial Entry on 16/10/2019

Dr XXXXX
Cr XXXXX

The University of Western Australia

 Example (B)
Office supplies were purchased on 16/10/2019 for $640.
A stock count on 30/6/2020 revealed $80 were still on hand and not yet
used. The Adjusting Entry is required.

Initial Entry on 16/10/2019:

$640
Dr Office Supplies (A) $640
Cr Bank (A) $640
Unused Used
$80 $560
Adjusting Entry on 30/6/2020:
Dr Supplies Expense (Ex) $560
Cr Office Supplies (A) $560

The University of Western Australia

Prepaid Income/Unearned Revenue

Example

One of your clients paid you $8,100 in commission fees in advance on

1/3/2020 to sell his 3 blocks of land.

By 30/6/2020 you had sold only ONE block of land.

The University of Western Australia

Prepaid Income/Unearned Revenue
Example
One of your clients paid you $8,100 in commission fees in advance on
1/3/2020 to sell his 3 blocks of land. By 30/6/2020 you had sold only
ONE block of land. The Adjusting Entry is required.

Initial Entry on 1/3/2020.

Dr Bank (A) $8,100
Cr Unearned Commission Fees (L) $8,100

1 Block sold x $8,100

3 Blocks = $2,700 Income Earned

Adjusting Entry on 30/6/2020

Dr Unearned Commission Fee (L) $2,700
Cr Commission Fee Revenue (I) $2,700
The University of Western Australia
Accrued Expenses

Example
An electricity bill has not been paid for the month of June of $250 and
the telephone expense covering April, May & June of $330 remains
unrecorded in the accounts.
Unpaid
Owing
Incurred but not yet recorded

The University of Western Australia

Accrued Expenses

Example
An electricity bill has not been paid for the month of June of $250 and
the telephone expense covering April, May & June of $330 remains
unrecorded in the accounts. The Adjusting Entry is required.
Unpaid
Owing
Incurred but not yet recorded

Adjusting Entry on 30/6/2020:

Dr Electricity Expenses (Ex) $250

Dr Telephone Expenses (Ex) $330
Cr Accrued Expenses (L) $580*

The University of Western Australia

 Alternative Adjusting Entry

Dr Electricity Expenses (Ex) $250

Dr Telephone Expenses (Ex) $330
Cr Telephone Payable (L) $330
Cr Electricity Payable (L) $250

The University of Western Australia

Accrued Income/Revenue Receivable

Example
On 1/10/2019 you have invested (3 years) $200,000 in a fixed term
deposit paying 8% interest per annum. The CBA Bank pays you the
interest yearly on 30th September of each year. The Adjusting Entry is
required on 30/06/2020.

$200,000 @ 8% Interest = $16,000 Interest Revenue Per Annum

The University of Western Australia

 Accrued Income/Revenue Receivable
Example
On 1/10/2019 you have invested (3 years) $200,000 in a fixed term
deposit paying 8% interest per annum. The CBA Bank pays you the
interest yearly on 30th September of each year.

1/10/2019 30/6/2020 30/9/2020

Maturity date /
Interest payable date

9/12 x $16,000 per annum = $12,000 Interest Income Earned

* Accrued Income could also be used.
The University of Western Australia
Interest paid on

The University of Western Australia

Adjusting Entry on 30/6/2020
Dr Interest Revenue Receivable * (A) $12,000
Cr Interest Revenue (I) $12,000

8% x $200,000 = $16,000 Interest per annum.

Final Entry when interest is received every year on the 30/9:

Dr Bank (A) $16,000

Cr Interest Revenue Receivable (A) $12,000
Interest Revenue (I) $ 4,000

July, August & September 2020

The University of Western Australia

Depreciation
*A Machine costing $300,000 on 1/1/2020 has an estimated useful
life of 10 years & an estimated salvage value of $40,000. The firm
uses the straight-line depreciation method.

Show:
1) The Adjusting Entry for the year ended 31/12/2020
2) The Balance Sheet as at 31/12/2020 after 5 years.
* (Assume the firm has a balance date of 31/12 every year)

The University of Western Australia

Depreciation
1) Cost – Salvage Value
Estimated useful life

= Depreciation per year

= $300,000 - $40,000
10 years

= $26,000 per year [Using the Straight-Line

Method]

•Adjusting Entry on 31/12/2020

Dr Depreciation of Machine (Ex) $26,000

Cr Accumulated Depreciation of Machine(-A) $26,000
The University of Western Australia
Depreciation

Balance Sheet as at 31/12/2020

Non-Current Assets
Machinery (At cost) $300,000
Less
Accumulated Depreciation *130,000
Carrying Amount $170,000

(5 years Depreciation @ $26,000 per annum = $130,000)

The University of Western Australia

Intangible Assets

 Copyrights
 Trademarks
 Franchise
 Patents
 Goodwill
 Brand Names
 Mastheads
 [All these Intangible Assets can be Amortised, except for
Goodwill which can be Impaired if necessary. This will result in
an Amortisation Expense or Impairment Expense in the A/C’s.]

The University of Western Australia

Amortisation

Company CD Ltd purchased a Patent on 1/7/2010 for $40,000

which has a life of 20 years.
The Adjusting Entry for Amortisation on 30/6/2020 would be as
follows.

Dr Amortisation of Patent (Ex) $2,000

Cr Accumulated Amortisation of Patent (-A) $2,000

The University of Western Australia

Balance Sheet as at 30/6/2020

Non-Current Assets
(Intangibles)
Patents (At cost) $40,000
Less
Accumulated Amortisation 20,000
Carrying Amount $20,000

The University of Western Australia

Effect on Accounts

- Correcting & Adjusting Entries allow for the

preparation of a Corrected/Adjusted Trial Balance
which results in a more accurate Profit/Loss.

The University of Western Australia

Your Trial Balance

Which of these errors will be detected by the TB?

 An expense debited to wrong expense a/c

 An item of revenue credited to an expense a/c

 A journal entry that does not balance, but is correctly posted

 One side of a Journal entry posted as $100 instead of $1,000

 A General Ledger balance added up incorrectly

 A General Ledger balance transposed when recorded in Trial Balance

(eg $3,295 entered as $3,925)

The University of Western Australia

Reversing Entries

Reversing entries ONLY required for:

1.Accrued Expenses
2.Accrued Income

Adjusting entry 30/6/2020

Reversing entry 1/7/2020

The University of Western Australia

Reversing Entries
 Not compulsory - same effect in two different ways

 Relate only to the temporary adjusting entries (eg not to

depreciation)

 Only ever done for convenience

 Eg, if the following adjusting entry is made at 30 June 2020

Set aside $10,000 as salaries
• Dr Salary Expense $10,000
• Cr Salaries Payable $10,000
When the actual salaries of $15,000 are paid on 6 July, 2020
there are two ways of recording this
The University of Western Australia
Method 1 (does not use reversing entries)

Dr Salary Expense 5,000

Dr Salaries Payable 10,000
Cr Cash 15,000
Recording salary payment on 6 July, 2020.

(Note: the expense recorded in July is only $5,000 &

the rest was recorded in June, 2020).

The University of Western Australia

Method 2 (uses reversing entries)

On 1 July, 2020
Dr Salaries Payable 10,000
Cr Salary Expense 10,000
(Reversing the accrual at 30 June, 2020)

On 6 July, 2020
Dr Salary Expense 15,000
Cr Cash 15,000

The University of Western Australia

Learning Objectives

Important to understand
 Cash vs Accrual Accounting

 Adjusting Journal Entries

 Extended Trial Balance

 Errors in Trial Balance

 Reversing Entries

The University of Western Australia

Accounting Cycle

 Unadjusted/Uncorrected Trial Balance

+ Correcting
Entries
 Corrected Trial Balance

+ Adjusting
Entries

 Adjusted/ Extended Trial Balance

The University of Western Australia

Accounting Cycle (Continued)

+ Closing
Entries

Post – Closing Trial Balance

The University of Western Australia

Correcting Entries (Examples)
General Journal

Accounts Payable 250

Cash 250
Wages Expenses 2,300
Sundry Expenses 2,300
Sales 1,800
Accounts Receivable 1,800

The University of Western Australia

Adjusting Entries (Examples)
General Journal

COGS 835
Inventory 835
Unearned Revenue 950
Sales Revenue 950
Interest Receivable 60
Interest Revenue 60
Interest Expense 1,200
Interest Payable 1,200
Wages Expenses 3,600
Wages Payable 3,600

The University of Western Australia

 CLASSIFICATION OF ITEMS IN TRIAL BALANCE

 IN Cr Income
 EX Dr Statement

 CA Dr
Tangible/
Intan’ble  NCA Dr
 -CA Cr
 -NCA Cr Balance
 CL Cr Sheet
 NCL Cr
 EQ Cr
 -EQ Dr

The University of Western Australia