TOPIC 5

ADJUSTMENT
ACCOUNTS
1

INTRODUCTION

ACCRUAL
BASIS
AND CASH
BASIS
ACCOUNTI
NG

ACCRUAL
BASIS
ACCOUNTI
NG

ACCRUAL
In accrual
BASIS basis
accounting,
ACCOUNTIN
revenues
are
G
recorded when
goods
or
services
were
sold regardless
of whether cash
has
been
received or not,
while expenses
were recorded
when goods or
services
are
used regardless
whether
they
were paid or
not.
In other
word, in accrual
basis
accounting,
both revenues
and
expenses
are
recorded
when
they
occur.

CASH BASIS
ACCOUNTIN
G

CASH
BASIS
ACCOUNTI
NG

In cash basis
accounting,
revenues
was
recorded when
cash
was
received
and
expenses
was
recorded when
cash paid.

INTRODUCTION
ACCRUALS AND PREPAYMENTS
After the Trial Balance has been drawn up,
there are adjustments that must be made to
the balances found in the Trial Balance.
The balances of expenditure and revenue
which are shown in the Trial Balances are
those of expenditure that have been paid and
revenue where cash has been received.
Adjustments must be made for the following:
Accrued expenses
Prepaid expenditure
Accrued revenue
Unearned revenue

ACCRUAL BASIS
ACCRUED EXPENSES
Accrued expenses are expenses have
not yet paid but goods and services
already in used or received.
The balances of expenditures
accounts show in trial balance are
the total expenditures paid during
the accounting period but the
amount may not really for the whole
of the accounting period incurred.
Accrued expenses happened when
total expenditures paid less than
total expenditure incurred for the
accounting period and it must include
into expenditures account before
posting to Statement of
Comprehensive Income (SOCI) and
record them as current liabilities in
Statement of Financial Position.
Example of accrued expenses are:

ACCRUAL BASIS

ACCRUAL BASIS

ACCRUAL BASIS
The adjusting entry:
a.General Day Book
Date

Particulars

2013
Dec 31

Salary
Accrued Salary
(Salary not yet paid)

Dec 31

SOCI
Salary
(Closing entry)

Debit (RM)

Credit
(RM)

400

400

2 400

2 400

ACCRUAL BASIS
b.General Ledger

ACCRUAL BASIS

Note:
RM 2 000 of the salary was paid, but the total amount transferred
to the Statement of Comprehensive Income (SOCI) is the salary
that should have been paid, which is RM2 400.
This amount includes RM400, which was accrued and not yet paid.
This accrued expense is recorded as a Current Liability in the
Statement of Financial Position (SOFP).

ACCRUAL BASIS

B. PREPAID EXPENSES
Prepaid expenses are expenses that have already paid but the goods
and services will only be used in the following accounting period.
The balances expenditures accounts show in the SOFP are the total
expenditures paid during the accounting period but the amount may
not really for the whole of the accounting period incurred.
Prepaid expenses happened when total expenditures paid is more than
total expenditure incurred for the accounting period and it must
exclude from expenditures account before posting to Statement of
Comprehensive Income (SOCI) and record them as current assets in
Statement of Financial Position (SOFP).

ACCRUAL BASIS
Example of prepaid expenses are:
B. PREPAID EXPENSES
1. The adjusting entry for accrued expenses is as
follows:
Dr
Prepaid Expenses Account
Cr Expenses Account
2. The closing entry for the accrued expenses is
as follows:
Dr
SOCI
Cr Expenses Account

ACCRUAL BASIS
Example:
The following information was extracted from
the book of Bestari Company
Trial Balance as at 31 December 2013

Insurance

Dr (RM)
6 000

Cr
(RM)

Additional information:
Insurance covered for the period of 1 st March
2013 to 28 February 2014

ACCRUAL BASIS
Working:
Insurance for the year
= RM6 000 X 10 months / 12 months
= RM 5 000 (total insurance covered for the
period ended 31 Dec 2013)
Therefore:
Prepaid insurance = Actual expenses paid
Actual expenses incurred
= RM6 000 RM5 000
= RM1 000

ACCRUAL BASIS
The adjusting entry:
General day book
Date

Particulars

Fol

2013
Dec 31

Prepaid insurance
Insurance
(Prepaid insurance for the year)
SOCI
Insurance
(Closing entry)

31

Debit
(RM)
1 000

Credit
(RM)

1 000

5 000

5 000

ACCRUAL BASIS
b.General ledger

ACCRUAL BASIS
Statement of Financial Position as at 31 Dec 2013
RM
Current Assets:
Prepaid insurance

1 000

Note:
The insurance paid during the accounting period was RM6 000
but total amount transfer to Statement of Comprehensive
Income (SOCI) was RM5 000 which is the actual amount should
be recognized into SOCI.
The prepaid insurance which is RM1 000 is for the next
accounting period. The prepaid insurance will be recorded as
current asset in Statement of Financial Position (SOFP) and will
be recognized as an expense in the next accounting period

ACCRUAL BASIS
C.
ACCRUED
REVENUE

Accrued revenue is income that has not

yet received but goods and services
already in used or received.
The balances of income accounts show in
the trial balance are the total income
received during the accounting period but
the amount may not really for the whole
of the accounting period incurred.
Accrued revenue happened when total
income received less than total income
recognized for the accounting period and
it must include into revenue account
before posting to SOCI and be recorded as
current asset in SOFP.

ACCRUAL BASIS
UNEARNED REVENUE
Example of accrued revenue is interest on
fixed deposits, commission on purchases.
The adjusting entry for accrued revenue is as follows

Dt Accrued revenue account

XXX

Ct. Revenue Account

XXX
The closing entry for accrued revenue is as follow

Dt Revenue account
Ct. Statement of Income
Statement XXX

XXX

ACCRUAL BASIS

ACCRUAL BASIS

Date
2013
Dec 31

31

Particulars
Rental
revenues

Fol

Advance rental
revenues
(To
record
unearned
rental
revenues)
Rental

revenues
SOCI
(Closing entry)

Debit (RM)
1 500

Credit (RM)

1 500

18 000

18 000

ACCRUAL BASIS

ACCRUAL BASIS

THE
END