ACW1100

Lecture Handout – Week 3

1. Accrual vs cash accounting
Activity
Year 1 Year 2
Purchased paint and paid Received cash $80,000 for work
Employees $50,000 and done in Year 1
Painted building

Accrual Revenue $ 80 000 Revenue $ -

basis Expense 50 000 Expense -
Profit $ 30 000 Profit $ -

Cash Revenue $ - Revenue $ 80 000

basis Expense 50 000 Expense -
Profit $(50 000) Profit $ 80 000

2. Prepaid expenses

a) Daniel’s Medical Centre purchases medical supplies in bulk. The last purchase on 1 March
2015 was for $990 worth of bandages, dressings and vaccinations which were recorded as an
asset. A count of medical supplies on 30 June 2015 revealed only $220 worth left in stock.

Required:
Prepare the adjusting entry required at 30 June 2015.

MEDICAL SUPPLIES SUPPLIES EXPENSE

1/3 Cash 990 30/6 Supplies exp 770 30/6 Med supplies 770

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 Date Details Debit Credit
30 June Supplies Expense 770

Medical Supplies 770

(adjusting entry for supplies consumed)

An adjusting entry is needed at 30 June to recognise that some of the medical supplies have been
consumed. The asset account, medical supplies, must be reduced. The expense account, supplies
expense, must be increased.

(b)
ABC Company paid $12,000 for 12 months advertising in the Yellow Pages on 1 March 2015.
The amount was recorded as prepaid advertising.

Required:
Prepare the adjusting entry required at 30 June 2015.

PREPAID ADVERTISING ADVERTISING EXPENSE

1/3 Cash 12,000 30/6 Advertising 4,000 30/6 Prepaid 4000
expense Advertising

Date Details Debit Credit

30 June Advertising Expense 4,000

Prepaid Advertising 4,000

(adjusting entry for 4 mths advertising consumed)

An adjusting entry is needed at 30 June to recognise that some of the prepaid advertising has
been consumed. The asset account, prepaid advertising, must be reduced. The expense account,
advertising, must be increased.

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(c)
A business has a motor vehicle which cost $25,000 on 1 January 2015, with an estimated residual
value of $5,000. It has an expected useful life of 5 years.

Required:
Calculate depreciation using the straight line method at 30 June 2015.

Solution:
Annual Depreciation charge= ($25,000-$5,000)/5 years=$4,000 per year
Jan 1 – June 30 = 6 months
Depreciation charge: $2,000

DEPRECIATION EXPENSE - VEHICLE ACCUMULATED DEPRECIATION -

VEHICLE
30/6 Acc Depn 2,000 30/6 Depn Exp 2,000

Date Details Debit Credit

30 June Depreciation Expense – Vehicle 2,000

Accumulated Depreciation - Vehicle 2,000

(adjusting entry for depreciation of vehicle)

An adjusting entry is needed at 30 June to recognise that some of the asset has been consumed.
The expense account, depreciation expense, must be increased. The negative asset account,
accumulated depreciation, must be increased (to reflect the overall reduction in benefits)

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 3. Unearned Revenue

(a)
A customer paid a $1,000 deposit on 1 May 2015 on a computer to be supplied on 15 June 2015,
which was recorded as a liability. The computer was supplied as planned.

Required:
Prepare the adjusting entry to record the revenue earned at 30 June 2015.

UNEARNED REVENUE SALES REVENUE

30/6 Sales Rev 1,000 1/5 Cash 1,000 30/6 Unearned 1,000
Revenue

Date Details Debit Credit

30 June Unearned Revenue 1,000

Sales Revenue 1,000

(adjusting entry for revenue earned)

An adjusting entry is needed at 30 June to recognise that the liability has been reduced as
income has been earned for the month ending 30 June. The liability account, unearned income,
must be reduced. The income account, sales revenue, must be increased.

4. Accrued revenue

A business has invested in shares to earn extra income through dividends. For the year ended 30
June 2015, dividends of $8,000 are due but have not been received.

Required:
Prepare the entry required to record the accrued revenue.

DIVIDENDS RECEIVABLE DIVIDEND REVENUE

30/6 Dividend 8,000 30/6 Dividend 8,000
Revenue receivable

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 Date Details Debit Credit
30 June Dividends Receivable 8,000

Dividend Revenue 8,000

(adjusting entry for revenue accrued)

An adjusting entry is needed at 30 June to recognise that income has been earned and an asset is
created. The asset account, dividends receivable, must be increased. The income account, dividend
income, must be increased.

Continued: Dividends revenue is received on August 1, 2015.

Method 1
Aug 1 Dr Bank 8,000
Cr Dividend Receivable 8,000

Method 2
a) Reversing entries:

July 1 Dr Dividend Revenue 8,000

Cr Dividend Receivable 8,000
b) Payment

Aug 1 Dr Bank 8,000

Cr Dividend Revenue 8,000

Conclusion: The net effect to Dividend Revenue account in Year 2 is nil. Both methods give you
the same outcome.

5. Accrued expenses

A company received and paid its electricity and gas accounts in May, for the three months of
February, March and April. The consumption was $330 per month.

Required:
Estimate and record the amount owing at 30 June 2015.

Solution:
Need to estimate based on historical records.
To estimate for 2 months – May and June 2015.

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 UTILITIES EXPENSE UTILITIES PAYABLE
30/6 Utilities 660 30/6 Utilities 660
Payable Expenses

Date Details Debit Credit

30 June Utilities Expense 660

Utilities Payable 660

(adjusting entry for expense accrued)

An adjusting entry is needed at 30 June to recognise that an expense has been incurred and to
create a liability. The expense account, utilities, must be increased. The liability account, utilities
payable, must be increased.