YEAR END ADJUSTMENT Learning Objectives 1 2 3

YEAR END ADJUSTMENT Learning Objectives 1. 2. 3. 4. 5. 6. 7. Adjust expense account for accruals and prepayments Adjust revenue accounts for amounts owing Accruals, prepayments & revenue in the balance sheet Expenses & revenues in the income statement Adjustment for drawings Extended trial balance Prepayment accruals & entries P 1 C 1 - 1

ADJUSTMENT FOR FINAL ACCOUNTS According to the matching concept, to determine net income for the period, costs and expenses for the period is matched against revenues for the same period. Revenue for Year 1 xxxxx Less: Expenses for Year 1 (xxxxx) Net Income for Year 1 xxxxx C 1 - 2

ADJUSTMENT FOR FINAL ACCOUNTS According to the accrual concept: expenses for the period means expenses incurred during the period and not cash paid. revenue for the period is revenue earned during the period, and not cash received. C 1 - 3

Types of adjustments Adjustment entries Prepayments Prepaid Expenses Unearned Revenues Accruals Accrued Revenues Accrued Expenses C 1 - 4

Types of adjustments, cont. Prepayments (Deferrals) Accruals Cash paid/received before consumption of related expense or revenue (recorded) Cash paid/received after consumption of expenses / revenues earned Expenses Prepaid Expenses • Expenses paid in advance • Recorded as assets before being used. Accrued Expenses • Expenses owed • For expenses incurred but not yet paid Revenues Unearned Revenues • Revenues received in advance • Recorded as liabilities before being earned Accrued Revenues • Revenues outstanding/not yet received • For revenues earned but cash has not been received C 1 - 5

Accrued Expenses Accrued expenses: expenses incurred, but not yet paid during the accounting period. These expenses are shown as current liabilities in the balance sheet. Double entries to record adjustments: Dr. Expenses (e. g Rent a/c) Cr. Accrued expenses (e. g Accrued Rent a/c) C 1 - 6

Prepaid Expenses Prepaid expenses: expenses that are paid in advance, but the benefits will be received in a future accounting period. These expenses are shown as current liabilities in the balance sheet. Double entries to record adjustments: Dr. Prepaid Expenses (e. g Prepaid Rent a/c) Cr. Expenses (e. g Rent a/c) C 1 - 7

Accrued Revenues Accrued revenues: Income earned, but not yet received during the accounting period. These expenses are shown as current asset in the balance sheet. Double entries to record adjustments: Dr. Accrued Revenue (e. g Accrued Rent Received a/c) Cr. Revenues (e. g Rent Received a/c) C 1 - 8

Prepaid Revenues Accrued expenses: Revenues received in advance for services not yet performed. These expenses are shown as current liabilities in the balance sheet. Double entries to record adjustments: Dr. Revenue (e. g Rent Received a/c) Cr. Prepaid Revenues (e. g Prepaid Rent Received a/c) C 1 - 9

Summary of Adjusting Entries Types of Adjustments Accounts Before Adjustments Adjusting Entries Prepaid Expenses Assets overstated Expenses understated Dr. Expense Cr. Asset Unearned Revenues Liabilities overstated Revenues understated Dr. Liability Cr. Revenue Accrued Revenues Assets understated Revenues understated Dr. Asset Cr. Revenue Accrued Expenses Liabilities understated Expenses understated Dr. Expense Cr. Liability C 1 - 10

Summary of Adjusting Entries • Purpose of adjusting entries – Measure income – Update balance sheet • Each adjusting entry affects – One income statement account • Revenue or Expense – One balance sheet account • Asset or liability C 1 - 11

The adjusted trial balance l An Adjusted Trial Balance is prepared after all adjusting entries have been journalized and posted. l Its purpose is to prove the equality of the total debit and credit balances in the ledger after all adjustments have been made. l Financial statements can be prepared directly from the adjusted trial balance. C 1 - 12

Example the format of Adjusted trial balance Account Title Trial Balance Dr Insurance Expenses xxxx Adjustments Cr Dr xxxx Salaries Expenses Subscription revenue Prepaid insurance Prepaid Consultancy fees xxxx Accrued Salaries xxxx Accrued subscription yyyy xxxx Cr Consultancy fees xxxx Adjusted Trial Balance xxxx yyyy xxxx yyyy xxxx yyyy C 1 - 13

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