RECORDING YEAR

END ADJUSTMENTS

TYPES OF ADJUSTING ENTRIES

WHAT IS ACCRUALS

Accruals are either :

expenses

that have been incurred but have not

yet been paid in the current financial year OR
revenues that have been earned but have not yet
been received in the current financial year

ACCOUNTING CONCEPT
RELATED
Periodicity

Assumption

Accountants make the assumption that the economic

life of a business can be divided into artificial time
periods. This assumption is referred to as the
periodicity or time period assumption. Many business
transactions affect more than one of these arbitrary
time periods. Therefore, it is necessary to determine
the relevance of each business transaction to specific
accounting periods.

ACCOUNTING CONCEPT
RELATED
Accrual

Basis of Accounting

Accrual basis of accounting means that events that

change a businesss financial
Statements are recorded in the periods in which the
events occur, rather than in the periods in which the
business receives or pays cash. For example, revenues
are recognised in the periods in which they are earned
and expenses are recognised when they are incurred.
Therefore, accountants have developed two principles
as part of the Generally Accepted Accounting
Principles (GAAP) to help in this determination. One of
these principles is the revenue recognition principle.
This principle dictates that revenue is considered to be
earned in a service enterprise at the time the service
is performed.

ACCOUNTING CONCEPT
RELATED
Matching

concept

In recognising expenses, accountants follow the

approach of let the expenses follow the revenues.
The practice of expense recognition is referred to as
the matching principle because it dictates that
efforts (expenses) be matched with accomplishments
(revenues).

HOW TO RECORD
ACCRUALS?

ACCRUED EXPENSES
Example 8.3
The wages bill for Muzaffar Trading Company is RM350 a
week (5 working days). On the statement of financial
position dated 30 June 20x6, a total of RM17,850 had been
paid for the year and wages for 3 working days of RM210
were owing. The adjusting entry must recognise the
liability to employees for work done but not yet paid for,
and also increase the expense account to the full amount
incurred for the period. The adjusting journal entry to
record this is as follows:

ACCRUED EXPENSES CONT.

The ledger accounts after posting the adjustment will
appear as follows:

ACCRUED EXPENSES CONT.

The closing journal entry would
be:

After posting this entry, the accounts would appear as

follows:

10

ACCRUED EXPENSES CONT.

On the first day of the next accounting period, it will be

necessary to reverse the adjustment made to avoid
double counting of the wages paid. Therefore, the
following reversing entry is required:

11

ACCRUED EXPENSES CONT.

After this entry is posted on the first day of the new
accounting period, and after the first pay day of the new
period has passed, the ledger accounts would appear as
follows:

12

ACCRUED REVENUE
(UNRECORDED REVENUE)
Example 8.4
Muzaffar Trading Company purchased RM10,000 of 10
per cent Bank Negara Bonds on 1 November 20x5 on
which interest is paid biannually on 31 March and 30
September. By 30 June 20x6, the firm will have received
interest for 6 months (RM500) but have earned interest
for 9 months (RM750). Therefore, there is 3 months
interest earned (RM250) for the period, but not yet
received. The adjusting journal entry to adjust the
ledger accounts is as follows:

13

ACCRUED REVENUE CONT.

The ledger accounts after this entry is posted would be
as follows:

14

ACCRUED REVENUE CONT.

As with accrued expenses, a reversing entry is necessary
at the beginning of the next period to avoid double
counting. The reversing entry ensures that this correct
apportionment of revenue is achieved between the two
periods. The entry would be:

15

ACCRUED REVENUE CONT.

After the interest is received on 30 September, the
ledger account would appear as follows:

16

WHAT IS THE EFFECT OF

ACCRUALS IN FINAL ACCOUNTS?

ACCRUALS IN THE FINAL

ACCOUNT

Statement of Financial Position:

Accrued

Expenses - Current Liabilities

Accrued Revenues Current Assets

WHAT IS PREPAYMENT

Prepayments are either :

Expenses

that have been paid OR

Revenues that have been received in advance

ACCOUNTING CONCEPT
RELATED

SAME AS ACCOUNTING CONCEPT RELATED

WITH ACCRUALS

HOW TO RECORD
PREPAYMENTS?

PREPAID EXPENSES
(EXPENSES PAID IN ADVANCE)
Example 8.1
Muzaffar Trading Company pays a 12-month motor
vehicle insurance premium of RM240 on 1 May. This
would be recorded as a debit of RM240 to the
expense account, Motor Vehicle Insurance Expense,
and a credit to the asset account, Cash. On 30 June,
two months later, the ledger has to be closed to
determine profit. Thus, it is necessary to recognise
two months or one-sixth of the RM240 (RM40) as an
expense and the remaining RM200 as prepaid for the
next period. The adjusting journal entry required on
30 June in the general journal would be:
22

Prepaid Expenses
(Expenses Paid in Advance)

After this entry has been posted, the ledger account

would be as follows:

23

PREPAID EXPENSES
(EXPENSES PAID IN ADVANCE)
The amount in the expense account would be closed
to the Statement of Profit or Loss and Other
Comprehensive Income. The closing journal entry
would be:

24

PREPAID EXPENSES
(EXPENSES PAID IN ADVANCE)
After this entry has been posted, the ledger account
would appear as follows:

25

PREPAID EXPENSES
(EXPENSES PAID IN ADVANCE)
As time passes in the next period, more and more of the
insurance premium will be based, thus ceasing to be an
asset. In recognition of this, the full prepayment is
immediately transferred back to the expense account.
The necessary reversing journal entry would be:

26

PREPAID EXPENSES
(EXPENSES PAID IN ADVANCE)
After this entry is posted, the ledger accounts would
appear as follows:

27

PREPAID REVENUE (REVENUE

RECEIVED IN ADVANCE/UNRECORDED
REVENUE)

Example 8.2

Muzaffar Trading Company received a 12-month

subscription from a customer on 1 March 20x6 of RM84.
This would be recorded by debiting the asset account,
bank, and crediting the revenue account, subscription
revenue. On 30 June 20x6, when the profit for the period
is to be determined, only 4 months of the subscription
period have passed, i.e. only one-third of the years
subscription received has been earned. The remaining
two-thirds, or RM56, is applicable to the next accounting
period. The adjustment to ensure only RM28 of revenue
is counted as earned and that liability for the remaining
RM56 is recognised as follows:
28

PREPAID REVENUE CONT.

The ledger account at the end of the period after profit

determination would appear as follows:

29

PREPAID REVENUE CONT.

To prepare the ledger for the next accounting period, it is

once again necessary to reverse the adjusting entry
made. The reversing journal entry would be:

30

PREPAID REVENUE CONT.

The ledger accounts would appear as
follows:

31

PREPAID REVENUE CONT.

The ledger accounts would appear as
follows:

32

WHAT IS THE EFFECT OF

PREPAYMENTS IN FINAL
ACCOUNTS?

PREPAYMENTS IN THE FINAL

ACCOUNT

Statement of Financial Position:

Prepaid

Expenses - Current Assets

Prepaid Revenues Current Liabilities

END