UNSW Business School

School of Accounting
ACCT1501 Accounting and Financial Management 1A
Session 2 2018

Week 5

Accrual Accounting Adjustments

Student Handout

Lecturer:
Dr. Youngdeok Lim
School of Accounting
UNSW

Moodle: https://moodle.telt.unsw.edu.au

Session 2, 2018 ACCT1501

 WEEK 5: Accrual Accounting Adjustments
1. Introduction

Accrual accounting exists to provide timely information about the financial affairs of
organisations to users for their economic decision-making. In financial accounting, the
focus is on providing useful information to external stakeholders such as shareholders
and creditors.

The financial affairs of organisations involve financial position, financial

performance, changes in equity and cash flows. The balance sheet addresses financial
position by showing the economic resources under the organisations control (assets)
and its financial and other obligations (liabilities). The balance sheet captures the
fundamental equation (A – L = OE) and it is the driving force in accrual accounting.
The need at regular intervals – at the end of each accounting period – to determine the
assets and liabilities of the enterprise is at the heart of accrual accounting and accrual
adjustments. In the business world, analysts and investors tend to focus on financial
performance for the accounting period, that is, profit or earnings. The profit is the
income less expenses for the period. Income equals revenue plus gains. The income
statement shows the revenues for the period less the expenses incurred in generating
those revenues – this is referred to as the matching principle.

Accrual accounting is superior to cash flow information to assess the financial

position and financial performance of an enterprise. Cash flow information only
records the financial effects of transactions and events on one asset, i.e. the cash
balance. In contrast, accrual accounting records the financial effects of transactions
and events that affect all the assets and liabilities of the enterprise. Consider this
simple example. Assume a company sold land that had cost $1m in return for plant
valued at $5m. This transaction would not be recorded in cash accounting. In accrual
accounting we would recognise the plant acquired as an asset in the balance sheet at
$5m and we would recognise a gain of $4m in the income statement from sale of land.

This week, adjusting entries are the key concept. Adjusting entries are the steps
required to ensure the accounts represent the assets, liabilities, revenues and expenses
once we get to the end of the accounting period. When preparing the financial
statements for the accounting period, we want to ensure that all assets, liabilities,
revenues and expenses are recognised and measured. To make sure this happen, we
have to adjust the accounts.

At the end of the accounting period we must ensure that:

• Wages payable (liability) are recorded together with the related wages expense for
the period.
• Interest receivable (asset) is recorded together with related interest revenue for the
period.
• Unearned revenue (liability) that has been settled by the provision of
goods/services is recognised as revenue – only the unearned revenue that remains
at the end of the period is a liability.

Session 2, 2018 ACCT1501

• Prepayments (asset) that have expired during the period are recognised as expense
only the prepayments that remain at the end of the period are an asset,

This week we also consider closing entries. Account balances for assets, liabilities and
equity carry forward from one accounting period to the next. In contrast, the account
balances for revenues and expenses must be closed at the end of the accounting period
to determine the profit for the period. A profit and loss summary account is used to
facilitate this process. The profit for the period is then transferred to retained profits.

Learning objectives

At the end of this topic you should be able to:

• Explain how the timing of revenue and expense recognition differs from cash
inflows and outflows
• Prepare journal entries for accrual accounting adjustments
• Understand contra accounts and the impact on the financial statements
• Understand and perform the closing process

Required reading

Trotman, Gibbins & Carson Chapter 5

2. Tutorial Questions – Week 5 – Due in Week 6

Students should attempt these questions before the tutorial.

Preparation Questions:
Student should review the following preparation questions using the solution
available from Moodle.
• DQ5.1, DQ5.3, DQ5.5, DQ5.12,
• P5.1, P5.7, P5.9, P5.20, P5.22, P5.25

Tutorial Questions:
Students should attempt the following questions before their tutorial class.
• DQ5.2, DQ5.4, DQ5.13,
• P5.16, P5.18, P5.21
• Case 5A*

Session 2, 2018 ACCT1501

 Billabong posts $126.3m half-year loss

Sue Mitchell
February 21, 2014

Troubled surf and skate wear retailer Billabong International is yet to see signs of a
turnaround, reporting a net loss of $126.3 million for the six months ending December
after booking another $132.6 million in asset writedowns and restructuring costs. The
loss compared with a bottom line loss of $536.6 million in the year-ago period. Before
one-off costs, underlying net profit fell from $19 million to just $1.8 million, falling
short of market forecasts around $6.5 million. Earnings continued to decline in North
America and Europe, offsetting gains in Australasia.

"This is a complex, difficult turnaround,” said chief executive Neil Fiske. "We are not
daunted by challenges we face, but neither do we underestimate them." Mr Fiske
unveiled a major global restructuring of marketing, merchandising, sourcing and HR
functions and announced several key appointments. "This is just the beginning - we
reiterate the turnaround is difficult and complex and the lag effect of months of
turmoil will be with us for a while longer," he said. "But we have confidence in the
potential of the brands and know what we need to do and are getting on with it at an
aggressive pace," he said.

Billabong shares went into a trading halt after the company launched its previously
announced $50 million rights issue. The funds will be used to repay existing debt. Mr
Fiske, who took the helm last September, hopes to restore profits by building
Billabong's three biggest brands - Billabong, RVCA and Element - as well as
supporting emerging brands and culling those that are cluttering the portfolio.

Mr Fiske also plans to reduce the number of products and stores, develop integrated
marketing strategies for each region, and improve Billabong's supply chain - moving
to fewer, bigger, suppliers - to reduce costs and improve the quality of its products.
Last month, Billabong shareholders approved a $386 million debt and equity rescue
package, which handed 41 per cent of the company to US hedge funds Oaktree
Capital and Centerbridge Partners. The company was in danger of collapse last year
after posting a $860 million loss and writing down the value of the Billabong brand to
zero. Group sales from continuing operations fell 2.4 per cent.

Read more: http://www.smh.com.au/business/retail/billabong-posts-1263m-halfyear-

loss-20140221-335k7.html#ixzz3Tln74Eg7

Session 2, 2018 ACCT1501

ACCT1501 Accounting and Financial Management 1A
Semester 2, 2018

Week 5:
Accrual Accounting Adjustments

Lecturer: Dr Youngdeok Lim

 Recap: Accounting cycle
1 SOURCE DOCUMENTS

During the
2 JOURNAL ENTRIES accounting period

3 POST TO LEDGERS

4 A TRIAL BALANCE

5 ADJUSTING JOURNAL ENTRIES

6 AN ADJUSTED TRIAL BALANCE End of accounting

period

7 CLOSING JOURNAL ENTRIES

8 POST-CLOSING TRAIL BALANCE

9 FINANCIAL STATEMENTS

2
 The Accounting Cycle
Accounting Period
Begin End
Step 1 Source Documents Step 4 (Unadjusted) Trial Balance

CHEQUE TRIAL BALANCE

BANK STATEMENT
INVOICE Account Name Debit Credit
RECEIPT Cash 8,000
COGS 6,000
Accounts Payable 3,000
Sales Revenue 11,000
Step 2 Journal Entries
Inventory 6,000

LEDGER: 131 INVENTORY 17,000 17,000

GENERAL JOURNAL Date Account Name Debit Credit
Balanced
Date Account Name Debit Credit
LEDGER: 101 CASH
12/03 Cash 11,000 Step 5 Adjusting Journal Entries
Sales Revenue 11,000 Date Account Name Debit Credit
COGS 12/03 Sales Revenue 11,000
6,000
Inventory 6,000 Step 6 Adjusted Trial Balance
30/05 Accounts Payable 3,000
30/05 Accounts Payable 3,000
Cash 3,000
Step 7 Closing Journal Entries

Step 8 Post-Closing Trial Balance

Step 3 Post to Ledgers
3 Step 9 Financial Statements
 Desired Learning Objectives LO

1. Explain how the timing of revenue and expense

recognition differs from cash inflows and outflows
2. Prepare journal entries for accrual accounting
adjustments
3. Understand contra accounts and the impact on the
financial statements
4. Understand and perform the closing process

4
 LO1
Cash and accrual accounting
Accrual accounting records:

– Revenues when they are earned, not received.

• E.g. Dr Accounts receivable xx Cr Sales revenue xx
– Expenses when they are incurred, not paid.
• E.g. Dr Wages expense xx Cr Wages payable xx
– Some items that have no cash flow effect.
• E.g. Dr Depreciation expense xx Cr Accumulated depreciation xx

Remember, cash accounting records revenues and expenses when…

– cash is received or paid.

5
 Accrual Accounting LO 1

• Often a timing difference between the significant

economic event (earning revenue/incurring expense) and
related cash flow
» Provide a more complete picture of economic
performance, particularly in the short term

• Does NOT imply that the payment or receipt of cash are

unimportant events
» The lifeblood of business
» Cash flow statement!

6
Revenue recognition (accrual entry)
LO 1

Case 3. Cash receipt 100 Case 1. Cash receipt 100 Case 2. Cash receipt 100
t-1 t

Sales 100

Case 1. Dr Cash 100

Cr Sales 100
Case 2. Dr Accounts receivable 100 Dr Cash 100
Cr Sales 100 Cr Accounts receivable 100
Dr Cash 100 Case 3. Dr Unearned revenue 100
Cr Unearned revenue 100 Cr Sales 100

7
Expense recognition (accrual entry)
LO 1

Case 3. Cash payment 100 Case 1. Cash payment 100 Case 2. Cash payment 100
t-1 t

Wages expense 100

Case 1. Dr Wages expense 100

Cr Cash 100
Case 2. Dr Wages expense 100 Dr Wages payable 100
Cr Wages payable 100 Cr Cash 100
Dr Prepaid wages 100 Case 3. Dr Wages expense 100
Cr Cash 100 Cr Prepaid wages 100

8
 LO1
Revenue recognition

1. Recognition of revenue (resource inflow) at the same time as cash

inflow.

– E.g. $ 1,000 sale to customer for cash.

– Cash entry:
Dr Cash 1000 (+A)
Cr Sales 1000 (+R)
– Accrual entry:
Dr Cash 1000 (+A)
Cr Sales 1000 (+R)
Note: both entries are the same.

9
 LO1
Revenue recognition
2. Recognition of revenue (resource inflow) prior to cash inflow

– E.g. $1,000 sale to customer on credit.

– Cash entry:
Nothing
– Accrual entry:
Dr Accounts receivable 1000 (+A)
Cr Sales 1000 (+R)

Note : the cash entry understates sales.

10
Revenue recognition LO1

3. Recognition of revenue (resource inflow) after cash inflow.

– E.g. $1,000 receipt of subscription fees in advance.

– Cash entry:
Dr Cash 1000 (+A)
Cr Sales 1000 (+R)
– Accrual entry:
Dr Cash 1000 (+A)
Cr Unearned revenue 1000 (+L)

Note : the cash entry overstates sales.

11
 LO1
Expense recognition

1. Recognition of expense (resource outflow) at the same time as cash

outflow.

– E.g. $1,000 payment of wages.

– Cash entry:
Dr Wages expense 1000 (+E)
Cr Cash 1000 (-A)
– Accrual entry:
Dr Wages expense 1000 (+E)
Cr Cash 1000 (-A)
Note: both entries are the same.

12
 LO1
Expense recognition

2. Recognition of expense (resource outflow) prior to cash outflow

– E.g. $1,000 wages owing at year end

– Cash entry:
Nothing
– Accrual entry:
Dr Wages expense 1000 (+E)
Cr Wages payable 1000 (+L)

Note: the cash entry understates expenses.

13
 LO1
Expense recognition

3. Recognition of expense (resource outflow) after cash outflow

– E.g. $1,000 payment of insurance for the next 24-month period.

– Cash entry:
Dr Insurance Expense 1000 (+E)
Cr Cash 1000 (-A)
– Accrual entry:
Dr Prepaid insurance 1000 (+A)
Cr Cash 1000 (-A)
Note : the cash entry overstates expenses.

14
 Summary: Cash versus Accrual Profit LO 1

• The earning of a revenue is not necessarily accompanied

by an inflow of cash in the same period

• The incurrence of an expense is not necessarily

accompanied by an outflow of cash in the same period

• Accrual profit is not the same as cash profit

• Over the life of business, total accrual profit equals total
cash profit.

• Note: when we refer to ‘profit’, we normally mean

accrual profit

15
 Desired Learning Objectives LO

1. Explain how the timing of revenue and expense

recognition differs from cash inflows and outflows
2. Prepare journal entries for accrual accounting
adjustments
3. Understand contra accounts and the impact on the
financial statements
4. Understand and perform the closing process

16
 LO2: Accrual Accounting Adjustments
• Why do we need adjusting journal entries?
• Revenues and expense may arise before or after cash flow
or at the same point in time
• Record accounting transaction to the appropriate time period
• Capture the ‘real’ picture of accounts
• Recall from last week:
• External transactions
• Internal transactions
• Adjusting entries are internal transactions that may be
required to make sure that assets and liabilities are
correctly recognised!
• At the end of the accounting period

17
 LO2
Accrual accounting adjustments

Adjusting entries are entries necessary at the end of the accounting period to
measure all revenues and expenses of that period.
Types:
1.Deferrals-related: When accrual entry records rev/exp after cash entry
1.1 Revenue adjustment: Unearned revenue
1.2. Expense adjustment: Prepayment (e.g. prepaid wages)
2. Accruals-related: When accrual entry records rev/exp prior to cash entry
2.1. Revenue adjustment: Accrued revenues (e.g. accounts receivable)
2.2. Expense adjustment: Accrued expenses (e.g. wages payable)
3. Valuation-related: Book value adjustments: Contra accounts
3.1. Asset adjustment: Allowance for doubtful debts (week 8),
Accumulated depreciation (week 9),
3.2. Liability adjustment

18
 Accrual Accounting Adjustments LO2

Deferrals Year End Accruals

1.1.Unearned revenue 2.1.Accrued revenue

Cash received Cash received
before earned after earned

#1 t #1
#2
Cash paid Cash paid
before incurred after incurred
1.2.Prepayment 2.2. Accrued expense

Each involves two entries:

#1 One for the cash receipt or payment
#2 One for recording the revenue or expense in the proper period (Adjusting entries)
19
 1.1 Unearned Revenue LO2

• Cash received in advance of earning revenue

• We defer the recognition of revenue
• An unearned revenue is a liability account!
• Liability becomes revenue when goods or services
owing are provided

• Examples: (we receive them) Liability

• insurance premiums
• magazine subscriptions
• rent received in advance

20
 LO2
1.1. Unearned revenue – An example

On 31 May, a company received $1200 for the service to be provided in the future
31 May Dr Cash 1,200 (+A) Period end
30 Jun
31 May 1 Jun
Cr Unearned revenue 1,200 (+L)

$100 of services provided

...

30 Jun Dr Unearned revenue 100 (-L)

Cr Sales revenue 100 (+R)

21
 Revision Question 1 LO2

On 15 September 2016, a surveyor received an advance of $7000 from

a client for future services. The work was completed to the client’s
satisfaction on 10 October 2016. The surveyor uses accrual
accounting.
What is the journal entry made by the surveyor on 15 September 2016?

A. Dr Cash 7000 Cr Unearned Revenue 7000

B. Dr Unearned Revenue 7000 Cr Cash 7000
C. Dr Cash 7000 Cr Surveying Revenue 7000
D. Dr Customer Deposits 7000 Cr Unearned Revenue 7000

22
 Revision Question 2 LO2

On 15 September 2016, a surveyor received an advance of $7000 from

a client for future services. The work was completed to the client’s
satisfaction on 10 October 2016. The surveyor uses accrual
accounting.
What is the journal entry made by the surveyor on 10 October 2016?

A. Dr Cash 7000 Cr Unearned Revenue 7000

B. Dr Accrued Revenue 7000 Cr Surveying Revenue 7000
C. Dr Unearned Revenue 7000 Cr Surveying Revenue 7000
D. Dr Surveying Revenue 7000 Cr Unearned Revenue 7000

23
 LO2
Lecture exercise (critical thinking)

What are adjusting entries?

One of the cash receipts credited to sales

revenue turned out to be a deposit of $600
made by a customer on an order that will be
filled a week after the end of the year.

24
 1.2 Prepayments LO2

• Cash paid in advance of incurring expense:

• There is still value extending into the future
• A prepayment represents an asset account!
• May be classified as current or non-current asset
depending on whether benefit extends beyond next
reporting period

• Examples: (we are paying) Asset

• Prepaid insurance
• Prepaid rent
• Office supplies

25
 LO2
1.2 Prepayments – Example 1

On 31 May, a company purchased office supplies of $1000.

31 May Dr Office supplies 1,000 (+A)
Period end
Cr Cash 1,000 (-A)
30 Jun
31 May
...
At 30 June, $300 of the office supplies remained
i.e. $700 had been consumed.

30 Jun Dr Office supplies expense 700 (+E)

Cr Office supplies 700 (-A)

26
 LO2
1.2 Prepayments – Example 1 (alternate way)

On 31 May, a company purchased office supplies of $1000.

31 May Dr Office supplies expense 1,000 (+E)
Period end
Cr Cash 1,000 (-A)
30 Jun
31 May
...
At 30 June, $300 of the office supplies remained
i.e. $700 had been consumed.

30 Jun Dr Office supplies 300 (+A)

Cr Office supplies expense 300 (-E)

27
 LO2
1.2 Prepayments – Example 2
On 1 May 2017, a company pays $1200 for a one-year rent. Financial year
ended date is 30 June 2017.
What journal entries will the company make on 1 May 2017 and 30 June
2017?

28
 LO2
1.2 Prepayments – Example 2

1 May Dr Prepaid rent 1,200 (+A)

Cr Cash 1,200 (-A) Period end

30 Jun
1 May
...

2-month rent has been used up

=$1,200/12 ×2 = $200

30 Jun Dr Rent expense 200 (+E)

Cr Prepaid rent 200 (-A)

29
 1.2 Prepayments – Example 3 LO2

• Opening balance prepaid rent $3000

• Closing balance prepaid rent: $4000
• Cash paid for rent during the year: $6000
• What was the rent expense for the year?
Prepaid Rent (A)

30
 2.1 Accrued Revenue LO2

• Instances where revenue has been earned, but cash not

received until the following period
• Think of it as a receivable account

• Examples:
• Commissions earned but not received
• Interest earned but not received

31
 LO2
2.1 Accrued revenue – An example
Orange company deposited $300 000 with a bank at 10 per cent per
annum on 1 March 2017 and interest is paid on 1 March every year
and the next payment of interest will be received on 1 March 2018.
Financial year ended date is 30 June 2017.
What journal entries will the company make on 30 June 2017 and 1
March 2018?

32
 LO2
2.1 Accrued revenue – An example

30 Jun Dr Interest receivable 10 000 (+A)

Cr Interest revenue 10 000 (+R)

1 Mar, 2017 Period end 30 June, 2017

... ...
$10 000 interest $20 000 interest 1 Mar, 2018
has been earned has been earned
(=$300,000×10%×4/12) (=$300,000×10%×8/12)

1 Mar Dr Cash 30 000 (+A)

Cr Interest receivable 10 000 (-A)

Cr Interest revenue 20 000 (+R)

Accrued interest revenue

= Interest receivable

33
 LO2
2.2 Accrued Expense
• Expenses are incurred, but cash not paid until the
following period
• Think of it as a payable account

• Examples:
• Wages earned by employees but not paid after end of
financial period
• Interest payable on outstanding loan

34
 2.2 Accrued Expense – An Example LO2

• A firm pays weekly wages of $10 000 each Friday.

• Balance date is 30 June (Wednesday) 10 000/5
• Hence, in the week that June 30 falls: = 2 000 per day

• Three days’ wages will relate to June ($6000)

• Two days’ wages will relate to July ($4000)
• What is the adjusting journal entry on June 30?
Fiscal Year End!

Mon Tues Weds Thurs Fri

June 28 June 29 June 30 July 1 July 2
$2 000 $ 2 000 $ 2 000 $ 2 000 $ 2000
Dr Wages expense $6 000 Accrued Wages
Cr Wages payable $6 000 = Wages Payable

35
 Revision Question 3
Which of the following would be recorded as an asset?

A. Prepayments
B. Accrued expenses
C. Revenue received in advance
D. All of the above would be recorded as assets

36
 LO3. Contra Accounts
• A contra account
• Is paired with and follows its related account
• Its normal balance (debit or credit) is the opposite of
the balance of the related account
• Make change in a balance sheet account without
changing the underlying value

• Examples:
• Accounts receivable → Allowance for doubtful debts (ADD)
• Property, plant and equipment → Accumulated depreciation
• Intangibles → Accumulated amortisation
• Inventory → Allowance for obsolescence
37
 3. Contra Accounts – Why are they useful
Allow users to ascertain:
• Accounts receivable → Allowance for doubtful debts (ADD)
• level of doubtful debts (and changes therein), collection
policies and problems Week 8
• Property, plant and equipment → Accumulated depreciation
• likely ages of assets and future cash outflows for purchases of
new assets Week 9
• Intangibles → Accumulated amortisation
• likely life of intangibles
• Inventory → Allowance for obsolescence
• levels of slow-moving, out-of-date stock, efficiency of stock
management

38
 3. Accumulated Depreciation
• Allocation of the cost of a noncurrent asset to expense
over the life of an asset
• To recognise the consumption of the asset’s economic
value
• Accumulated depreciation (a contra asset account, B/S)
shows all depreciation charged against an asset to date.

• Depreciation expense (Income statement) shows only this

year’s depreciation allocation

39
 3. Contra Account – An Example
Asset costs $100 000 with a life of 4 years and no estimated
salvage value. Straight line depreciation each year:

Dr Depreciation expense 25 000

Cr Accumulated depreciation 25 000

After 3 years, book value is:

Asset $100 000
Accumulated depreciation ($75 000)
Book value (net assets) $25 000

40
 Desired Learning Objectives

1. Explain how the timing of revenue and expense

recognition differs from cash inflows and outflows
2. Prepare journal entries for accrual accounting
adjustments
3. Understand contra accounts and the impact on the
financial statements
4. Understand and perform the closing process

42
 Revision Question 4
T Ltd paid $240 000 in wages during the year. The
opening balance of Accrued Wages was $8000 and
the closing balance was $10 000. What was the
wages expense for the year?

A. $238 000.
B. $240 000.
C. $242 000.
D. None of the above.

43
 LO4. Closing Entries
• Final journal entries of the accounting period
• Reduce the balance of temporary accounts to zero (i.e. to
close them)
• Income Statement accounts are temporary accounts
• Balance Sheet accounts are permanent accounts

• Then transfer the resulting profit (or loss) to Retained

Profits

44
 Closing Entries
• A temporary account called Profit and Loss Summary is
created. Closing entries are made in the following order:

• Revenue accounts closed with DR entries

• Expense accounts closed with CR entries
• Balance in P&L Summary transferred to Retained Profits
• Dividends are declared/paid from Retained Profits

45
 The Accounting Cycle
Accounting Period
Begin End
Step 1 Source Documents Step 4 (Unadjusted) Trial Balance

CHEQUE TRIAL BALANCE

BANK STATEMENT
INVOICE Account Name Debit Credit
RECEIPT Cash 8,000
COGS 6,000
Accounts Payable 3,000
Sales Revenue 11,000
Step 2 Journal Entries
Inventory 6,000

LEDGER: 131 INVENTORY 17,000 17,000

GENERAL JOURNAL Date Account Name Debit Credit
Balanced
Date Account Name Debit Credit
LEDGER: 101 CASH
12/03 Cash 11,000 Step 5 Adjusting Journal Entries
Sales Revenue 11,000 Date Account Name Debit Credit
COGS 12/03 Sales Revenue 11,000
6,000
Inventory 6,000 Step 6 Adjusted Trial Balance
30/05 Accounts Payable 3,000
30/05 Accounts Payable 3,000
Cash 3,000
Step 7 Closing Journal Entries

Step 8 Post-Closing Trial Balance

Step 3 Post to Ledgers
46 Step 9 Financial Statements
The Accounting Cycle
Accounting Period
Begin End
Step 1 Source Documents Step 4 (Unadjusted) Trial Balance

Step 5 Adjusting Journal Entries

Step 2 Journal Entries

Step 6 Adjusted Trial Balance

Step 3 Post to Ledgers

Step 8 Post-Closing Trail Balance Step 7 Closing Journal Entries

Purposes of Closing Temporary Accounts

POST – CLOSING TRIAL BALANCE
Journal Entries?
/
(1) Transfer the balances of
Account Name Debit Credit
the revenue and
Cash 8,000 expense accounts to Dr Sales Revenue 11 K Dr P & L Summary 6K Dr P & L Summary 5K
COGS 6,000 a profit and loss Cr P & L Summary 11 K Cr COGS 6K Cr Retained Profits 5K

Accounts Payable 3,000 summary and then to

retained profits. Revenue Expense
Sales Revenue 11,000
(2) Reset the revenue and Dr. Cr. Dr. Cr.
Inventory 6,000 Close Temporary
expense account
Debit to Credit to Debit to Credit to accounts: Revenues
Retained Profits 5,000 balances to zero to
decrease increase increase decrease and Expenses
begin recording these
11,000 11,000 - + + -
items for the next
Permanents
accounting period.
accounts: Assets,
Liabilities and Equity,
are NEVER closed.
47 Step 9 Financial Statements
 Comprehensive Class Example – Journal Entries (week 4)

Transactions 1 to 4
AC DR CR
1 Cash A1 23 940
Accounts Receivable A2 4 660
Piano Tuning Fees R1 28 600
2 Cash A1 16 800
Accounts Receivable A2 7 580
Piano Repair Fees R2 24 380
3 Supplies A4 340
Accounts Payable L1 340
4 Bank Loan L3 3 000
Interest Payable L2 440
Interest Expense E6 420
Cash A1 3 860

48
 Comprehensive Class Example – Journal Entries (week 4)

Transactions 5 to 8
AC DR CR
5 Petrol and Oil Expense E1 2 680
Cash A1 2 680
6 Prepaid Insurance A3 840
Cash A1 840
7 Telephone Expense E5 2 240
Cash A1 2 240
8a Cash A1 13 900
Accounts Receivable A2 13 900
8b Accounts Payable L1 2 000
Cash A1 2 000

49
 Comprehensive Class Example – Trial Balance
Trial Balance
Acc. Co. Account Name Debit Credit
A1 Cash at bank 46 300
A2 Accounts receivable 2 220
A3 Prepaid insurance 1 030
A4 Supplies 550
A5 Motor vehicle 21 400
A5.1 Accumulated depreciation – MV 8 026
L1 Accounts payable 280
L2 Interest payable
L3 Bank loan 4 000
L4 Telephone expense payable
SE1 Share capital 11 000
SE2 Retained profits 554
SE3 Profit and loss summary
R1 Piano tuning fees 28 600
R2 Piano repair fees 24 380
E1 Petrol and oil expense 2 680
E2 Depreciation expense – MV
E3 Supplies expense
E4 Insurance expense
E5 Telephone expense 2 240
E6 Interest expense 420
50 $76 840 $76 840
 Comprehensive Class Example – Adjusting Entries

• The following information relating to adjusting

entries is available at the end of June 2017
• Transactions 9 – 13
(9) A physical count showed supplies costing $180 on hand at 30 June
2017 (cross-reference transaction 3)
Supplies
o/b 210 Supplies Expense 370
(3) AP 340

c/b 180
Dr Cr
Supplies Expense E3 370
Supplies A4 370
51
 Comprehensive Class Example – Adjusting Entries
• (10) Accrued interest on the bank loan is $240
Dr Cr
Interest Expense E6 240
Interest Payable L2 240

• (11) Insurance costing $820 expired during the year (cross-reference

to transaction 6)
Prepaid Insurance
o/b 190 Insurance Expense 820
(6) Cash 840

c/b 210
Dr Cr
Insurance Expense E4 820
Prepaid Insurance A3 820
52
 Comprehensive Class Example – Adjusting Entries

• (12) Depreciation on the vehicle is $5,350

Dr Cr
Depreciation Expense – MV E2 5,350
Accumulated Depreciation – MV A5.1 5,350

• (13) The June telephone account for $180 has not been
paid or recorded
Dr Cr
Telephone Expense E5 180
Telephone Expense Payable L4 180

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 Comprehensive Class Example – Adjusted Trial Balance
Adjusted
Trial Balance Trial Balance
Acc. Co. Account Name Debit Credit Debit Credit
A1 Cash at bank 46 300 46 300
A2 Accounts receivable 2 220 2 220
A3 Prepaid insurance 1 030 210
A4 Supplies 550 180
A5 Motor vehicle 21 400 21 400
A5.1 Accumulated depreciation – MV 8 026 13 376
L1 Accounts payable 280 280
L2 Interest payable 240
L3 Bank loan 4 000 4 000
L4 Telephone expense payable 180
SE1 Share capital 11 000 11 000
SE2 Retained profits 554 554
SE3 Profit and loss summary
R1 Piano tuning fees 28 600 28 600
R2 Piano repair fees 24 380 24 380
E1 Petrol and oil expense 2 680 2 680
E2 Depreciation expense – MV 5 350
E3 Supplies expense 370
E4 Insurance expense 820
E5 Telephone expense 2 240 2 420
E6 Interest expense 420 660
54 $76 840 $76 840 $82610 $82610
 Comprehensive Class Example – Closing Entries

Piano tuning fees R1 Piano repair fees R2

Cash $23 940 Cash $16 800
A/R $4 660 A/R $7 580
Bal. $28 660 Bal. $24 380
DR DR

Dr Cr
Piano Tuning Fees 28,600
Piano Repair Fees 24,380
P&L Summary 52,980

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 Comprehensive Class Example – Closing Entries

Piano Tuning Fees R1 Piano Repair Fees R2

P&L Cash 23 940 P&L Cash 16 800
summary 28 660 AR 4 660 summary 24 380 AR 7 580

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 Comprehensive Class Example – Closing Entries

Petrol and Oil Expense Dep Expense – MV

(5) Cash 2 680 (12) Acc Dep 5 350
CR CR

Supplies Expense Insurance Expense

(9) Supplies 370 (11) Prepaid Ins 820
CR CR

Telephone Expense Interest Expense

(7) Cash 2 240 (4) Cash 420
(13) Tel Exp Payable 180 CR (10) Int Payable 240 CR

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 Comprehensive Class Example – Closing Entries

Dr Cr
P&L Summary 12,300
Petrol and Oil Expense 2,680
Depreciation Expense 5,350
Supplies Expense 370
Insurance Expense 820
Telephone Expense 2,420
Interest Expense 660

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 Comprehensive Class Example – Closing Entries

Petrol and Oil Expense Dep Expense – MV

(5) Cash 2 680 P&L sum 2 680 (12) Acc Dep 5 350 P&L sum 5 350

Supplies Expense Insurance Expense

(9) Supplies 370 P&L sum 370 (11) Prepaid Ins 820 P&L sum 820

Telephone Expense Interest Expense

(7) Cash 2 240 P&L sum 2 420 (4) Cash 420 P&L sum 660
(13) Tel Exp 180 (10) Int Payable 240
Payable

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 Comprehensive Class Example – Closing Entries

Profit & Loss Summary

Expenses 12,300 Revenues 52,980
Retained Profits 40,680

Dr Cr
P&L Summary 40,680
Retained Profits 40,680

Retained Profits
o/b 554
P&L Summary 40,680
c/b 41,234

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 Comprehensive Class Example – Post-Closing Trial Balance

Account
Account code Debit Credit
Cash at bank A1 46 300
Accounts receivable A2 2 220
Prepaid insurance A3 210
Supplies A4 180
Motor vehicle A5 21 400
Accumulated depreciation – motor vehicle A5.1 13 376
Accounts payable L1 280
Interest payable L2 240
Bank loan L3 4 000
Telephone expense payable L4 180
Share capital SE1 11 000
Retained profits SE2 41 234
$70 310 $70 310

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Take away
Types of adjusting entries:
1.Deferrals
1.Deferrals-
Deferrals-related
1.1 Revenue adjustment: Unearned revenue
1.2. Expense adjustment: Prepayment
2. Accruals
Accruals--related
2.1. Revenue adjustment: Accrued revenues
2.2. Expense adjustment: Accrued expenses
3. Valuation-
Valuation-related: Book value adjustments: Contra accounts
3.1. Asset adjustment: Allowance for doubtful debts, Accumulated depreciation
3.2. Liability adjustment

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 Next Lecture

Comprehensive class example (continued) - Worksheet

Week 6 Lecture: Financial Reporting Principles,

Accounting Standards and Auditing

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