ADJUSTMENTS FOR ACCRUALS & PREPAYMENTS

LEARNING OUTCOMES
At the end of the session, 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
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INTRODUCTION
Financial statements are prepared from the trial balance; However, the trial balance may not contain up-to-date and complete financial statements data; Trial balance are balances from the ledger books; whereby only expenses paid and revenues received were recorded.

INTRODUCTION (cont)
Adjusting entries are needed at the end of accounting period; 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. Reasons:
to get correct net profit figure for the period as to comply the matching concept
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PREPAID EXPENSES
Payments of expenses that will benefit more than 12 months period. Prepaid expenses / extra payment of expenses will be treated as current asset. Example:
Trial Balance as at 31/3/2010 (extract) DR CR

Rent and insurance

1,790

Additional information as of 31/3/2010: Rent and insurance prepaid RM150.

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WORKED EXAMPLE
EXPENSES YEAR-END BALANCES 1,790 ADJUSTMENT ACTUAL EXPENSES FOR THE PERIOD 1,640 Rent and insurance - 150

Prepayments will decrease year-end balance.

Income statement for the year ended 31/3/2010 (extract) RM RM 1,640 RM

Operating expenses
Rent and insurance

Balance Sheet as at 31/3/2010 (extract)

RM Current Assets Prepaid rent and insurance 150
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RM

RM

ACCRUED EXPENSES
Expenses incurred in the accounting period but payment has not been made. Accrued expenses/expenses still owing will be treated as current liabilities. 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.

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WORKED EXAMPLE
EXPENSES YEAR-END BALANCES 8,980 ADJUSTMENT ACTUAL EXPENSES FOR THE PERIOD 9,190 Wages and salaries + 210

Accruals will increase year-end balance.

Income statement for the year ended 31/3/2010 (extract) RM RM 9,190 RM

Operating expenses
Wages and salaries

Balance Sheet as at 31/3/2010 (extract)

RM Current Liabilities Accrued wages and salaries 210
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RM

RM

REVENUES RECEIVED IN ADVANCE (UNEARNED REVENUES)

Payment received for services to be provided in a future accounting period. Revenues received in advance will be treated as current liabilities. 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.

WORKED EXAMPLE
REVENUES YEAR-END BALANCES 650 ADJUSTMENT ACTUAL REVENUES FOR THE PERIOD 600 Rent received - 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
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RM

RM

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

Additional information as of 31/3/2010: Commission revenues still accrued RM100.

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WORKED EXAMPLE
REVENUES YEAR-END BALANCES 1,100 ADJUSTMENT ACTUAL REVENUES FOR THE PERIOD 1,200 Commission received + 100

Accruals will increase year-end balance.

Income statement for the year ended 31/3/2010 (extract) RM RM 1,200 RM

Other revenues
Commission received

Balance Sheet as at 31/3/2010 (extract)

RM Current Assets Accrued commission received 100
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RM

RM

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

To record accrued revenue

Accrued revenue

Revenue

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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
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