Balance Day Adjustments

1. Balance Day Adjustments Accrued Expenses

2. Your mobile phone bill shows that you have not settled last month’s amount. This month mobile phone bill shows an outstanding amount of $100 and the current amount of $80. Hence this outstanding amount of $100 is also known as accrued expense.

3. Balance Day Adjustments - Accrued Expenses Phua CK is pretending to be calm but actually is very confused. He should have paid $12 000 for the rent for the period from January to December 2000. Scenario 1 However, at the end of the period, he only paid $5 000 to Tan Ah Teck Pte Ltd due to negligence. He still owes the company $7 000. He does not know the correct entries to reflect this!

4. Let us help him. End of accounting period – December 2000 Should have paid : $ 12 000 Paid only : $ 5 000 Owed : $ 7 000 This owing amount of $7 000 is also known as Accrued Rent Expense. Mr. Phua CK still owes Tan Ah Teck Ltd $7 000 that was not paid for the year of 2000.

5. Balance Day Adjustments - Accrued Expenses Definition: • Are expense that have been incurred for the accounting period BUT amount not yet paid for by the business.

6. Balance Day Adjustments - Accrued Expenses What is the nature of accrued expense? Debit or Credit entry? Yes…. Credit entry because it is a liability (still owe people $)

7. Using Phua CK as an example. If Mr. Phua remembered to pay the rent amount in full, then the entries will be:- JOURNAL Date Particulars Debit Credit Year 2000 Dec 31 $12 000 $12 000 Rent Expense Profit and Loss a/c However, this is not the case. An additional ledger needs to be created – Accrued Rent Expense

8. JOURNAL Date Particulars Debit Credit Year 2000 $7 000 Dec 31 $7 000 Rent Expense Rent Expense (Accrued) RENT EXPENSES a/c Year 2000 Dec 31 Bank$5 000 Year 2000 Dec 31 Profit & Loss$12 000 Bal c/d $7 000 $12 000 $12 000 Year 2001 Jan 1 Balb/d$7 000

9. JOURNAL Date Particulars Debit Credit 2000 Dec 31 Profit & Loss a/c $12 000 Rent Expense $12 000 (Being rent expense closing off to P&L a/c) Profit & Loss Account 2000 Dec 31 Expenses $12 000 Balance Sheet as at Dec 2000 Liability Accrued Rent Expense $7 000

10. Balance Day Adjustments - Accrued Expenses Summary • Definition • Credit/Debit nature? • Is there a need to open another ledger for accrued expense? • Post this ledger to P/L or Balance Sheet?

11. Balance Day Adjustments Accrued Revenue

12. Your father is very angry! Due to Economic crisis, the company your father is working for is unable to pay him salary for this month. However, his salary will be delayed till next month.

13. Assume that your father is earning a monthly salary of $5 000. The company will pay in total of $10 000 to your father next month ($5 000 x 2), being one month of salary owing to your father. This owing salary is known as ACCRUED Salary. This applies same to firms whereby revenues owing to them is known as Accrued Revenues. Definition Are revenues earned for the current accounting period but not yet received as cash payment.

14. Accrued Revenue/Outstanding Revenue • Mr Tan sub-lets a building for Phua CK for a monthly rental of $1 000. Due to Phua’s negligence, Mr Tan does not receive $12 000 for period from January to December 2000. Instead Mr Tan only receives $5 000 from Phua. Scenario 1

15. Accrued Revenue/Outstanding Revenue End of accounting period – December 2000 Should have received : $ 12 000 Only received : $ 5 000 Outstanding revenue : $ 7 000 This owing amount of $7 000 is also known asAccrued Rent Revenue. Mr. Tan still owes PCK Ltd $7 000 that was not paid for the year of 2000.

16. Accrued Revenue/Outstanding Revenue 1 Jan 2000 31 May 2000 31 Dec 2000 $ 5 000 received $7 000 owing $12 000 earned JOURNAL Date Particulars Debit Credit Year 2000 $7 000 Dec 31 $7 000 Rent Revenue (Accrued) Rent Revenue

17. Accrued Revenue/Outstanding Revenue RENT REVENUE a/c Year 2000 Dec 31 Bank $5 000 Year 2000 Dec 31 Profit & Loss $12 000 31 Bal c/d $7 000 $12 000 $12 000 Year 2001 Jan 1 Bal b/d $7 000 PROFIT AND LOSS a/c Year 2000 Dec 31 Rent $12 000 Revenue 17

18. RENT REVENUE a/c Year 2000 Dec 31 Bank $5 000 Year 2000 Dec 31 Profit & Loss $12 000 31 Bal c/d $7 000 $12 000 $12 000 Year 2001 Jan 1 Bal b/d $7 000 BALANCE SHEET AS AT 31 DEC 2000 Current Asset Accrued Revenue $7 000

19. Balance Day Adjustments - Accrued Revenue • Definition • Nature of the entry - Debit or Credit entry? • Distinguish the differences in adjustments between the Accrued Expenses and Accrued Revenues Summary

20. Balance day Adjustments Prepaid Expenses

21. Singtel has a promotion for new subscribers. If you paid the 6 months of mobile-phone monthly subscription upfront NOW, you get a free Nokia 8250.

22. Assuming that the monthly subscription is $20. You like the promotion and paid $1 200 (6x$20) immediately in order to get the new mobile phone. Hence you are paying in advance for the expense. The payment in advance of subscription fees ($1 200) is also known as Prepaid Expense.

23. Prepaid Expense/Payment in Advance Are expenses that have been paid in advance but NOT yet incurred for the current accounting period. Definition

24. Since expense is a debit entry. If the expense had been prepaid, what will be the nature of the entry? Prepaid expense is like an asset to the firm as it is similar to people owing services to the firm. Hence a DEBIT ENTRY.

25. Prepaid Expense/Payment in Advance Phua CK learnt his lesson last time of not paying on time last year, so he decides to pay in advance to “save his face” this year. The rent expense for the accounting year of 2001 is $12 000, but he pays $18 000. Hence he prepaid $6 000 for expenses that has not been incurred in 2001. Scenario 2

26. Prepaid Expense/Payment in Advance Recall that the monthly rent expense is $1 000. Hence from January to December 2001, the total rent is $12 000. Phua CK prepaid rent expense of $6 000 for January to June 2002. 1 Jan 2001 31 Dec 2001 30 June 2002 $ 12 000 incurred $6 000 prepaid $18 000 paid

27. JOURNAL Date Particulars Debit Credit Year 2001 $6 000 Dec 31 $6 000 Rent Expense (Prepaid) Rent Expense RENT EXPENSES a/c Year 2001 Dec 31 Bank$18 000 Year 2001 Dec 31 Balance c/d $ 6 000 Profit & Loss$12 000 $18 000 $18 000 Year 2002 Jan 1 Bal b/d$6 000

28. Profit & Loss Account 2001 Dec 31 Expenses $12 000 Balance Sheet as at Dec 2001 Current Assets Prepaid Rent Expense $6 000 Summary • Definition • Credit/Debit nature? • What are the differences in adjustments between the accrued and prepaid expenses?

29. Balance Day Adjustments Prepaid Revenue

30. Balance Day Adjustments You have found a part-time job in MacDonald for three months. Your monthly salary is $500. By the end of the first month, you should have received $500 of what you have earned. However, the manager is such a nice person that he gives you $1 000. (Two months’ salary). He understands that you need money to enjoy your school holidays.

31. Balance Day Adjustments Received : $500 x 2 (Two month’s salary) = $1 000 Earned : $500 Paid in advance : $500 This prepaid of salary (revenue) is known as Prepaid Revenue /Outstanding Revenue. $500 is the prepaid Revenue.

32. Prepaid Revenue/ Outstanding Revenue DEFINITION Are revenues received in advance for which the services not yet rendered/earned in the particular accounting year. Hence the received cash for such revenues is not considered as revenues for the current accounting year.

33. Prepaid Revenue/ Outstanding Revenue • Recall that Mr Phua CK decided to pay in advance his rents to “save face”. Hence Mr Tan received $18 000, in which $12 000 is the revenue earned for the accounting year of 2001 and $6 000 is prepaid revenue. Scenario 2

34. Prepaid Revenue/ Outstanding Revenue 1 Jan 2001 31 Dec 2001 31 June 2002 $ 12 000 earned $6 000 in advance $18 000 received JOURNAL Date ParticularsDebitCredit Year 2001 $6 000 Dec 31$6 000 Prepaid Rent Expense Rent Expense

35. Prepaid Revenue/ Outstanding Revenue RENT REVENUE a/c Year 2001 Dec 31 Bank $18 000 Year 2001 Dec 31 Profit & Loss $12 000 Prepaid rent $6 000 Revenue $18 000 $18 000 PROFIT AND LOSS a/c Year 2001 Dec 31 Rent $12 000 Revenue

36. Prepaid Revenue/ Outstanding Revenue PREPAID RENT REVENUE a/c Year 2001 Dec 31 Bal c/d $6 000 Year 2001 Dec 31 Rent Revenue $6 000 $6 000 $6 000 Year 2002 Jan 1 Bal b/d $6 000 BALANCE SHEET AS AT 31 DEC 2001 Current Liabilities Prepaid Revenue $6 000

37. Balance Day Adjustments - Prepaid Revenue • Definition • Nature of the entry • Distinguish the differences in adjustments between accrued revenues and prepaid revenues Summary

38. Practice! Accrued & Prepaid Revenues

39. Practice - Accrued and Prepaid Revenues Trial Balance as at 31 August 2001 Particulars Debit Credit $ $ Rent 1 500 Commission 7 000 Adjustments $300 of the rent revenue was received in advance. The monthly commission was $700. The accounting period is from 1 July 2000 to 31 August 2001

40. Practice - Accrued and Prepaid Revenues JOURNAL Particulars Debit Credit $ $ Rent Revenue 300 Prepaid Rent Revenue 300 (Being amount of revenue received in advance) 1 Accrued Commission Revenue 1 400 Commission Revenue 1 400 (Being revenue earned but not yet received) 2

41. 1 Prepaid Rent Revenue Rent Revenue $ $ Prepaid Rent Rev 300 Cash at Bank 1 500 Profit & Loss 1 200 Prepaid Rent Revenue $ $ Bal c/d 300 Rent Revenue 300 Profit & Loss for the year ended 31 Aug 2001 $ $ Rent Revenue 1 200 Balance Sheet as at 31 Aug 2001 $ Current Liability Prepaid Rent Rev 300 $

42. 2 Accrued Commission Revenue Commission Revenue $ $ Profit & Loss 8 400 Cash at Bank 7 000 Accrued Comm Rev 1 400 Accrued Commission Revenue $ $ Rent Revenue 1 400 Bal c/d 1 400 Profit & Loss for the year ended 31 Aug 2001 $ $ Rent Revenue 8 400 Balance Sheet as at 31 Aug 2001 $ Current Asset Accrued Comm Rev 1 400 $

43. Credit Entry Debit Entry Debit Entry Credit Entry Conclusion 1.Definition Amount incurred for the accounting period but not yet paid for. Accrued Expenses Amount not yet incurred for the accounting period buy have been paid for. Prepaid Expenses Amount earned for the accounting period but not yet received as cash payment. Accrued Revenues Amount not earned for the accounting period but have been paid for. Prepaid Revenues

44. Conclusion 2.Adjustments Dr Expense A/C Cr Accrued Expense A/C Accrued Expenses Dr Prepaid Expense A/C Cr Expense A/C Prepaid Expenses Dr Accrued Revenue A/C Cr RevenueA/C Accrued Revenues Dr Revenue A/C Cr Prepaid Revenue A/C Prepaid Revenues

45. Conclusion 3.Balance Sheet Current Liability Accrued Expenses Current Assets Prepaid Expenses Current Assets Accrued Revenues Current Liability Prepaid Revenues

46. Practice! Accrued & Prepaid Expenses

47. Practice - Accrued and Prepaid Expenses • During the year of 2001, the cash book shows: • maintenance Expense $ 900 • Selling Expense $1 200 • On 31 May 2001, the Balance Sheet also shows • Prepaid Maintenance Expense $ 400 • Accrued Selling expense $ 300 • Find the actualamount of the expenses incurred for the year of 2001.

48. 1 Prepaid Maintenance Expense Maintenance Expense $ $ Cash at Bank 900 Profit & Loss 500 Prepaid Maint Exp 400 900 900 2 Accrued Selling Expense Selling Expense $ $ Cash at Bank 1 200 Profit & Loss 1 500 Accrued Selling Exp 300 1 500 1 500

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