CHAPTER 6
CHAPTER 6
ADJUSTMENTS FOR
ADJUSTMENTS FOR
ACCRUALS
ACCRUALS
AND
AND
PREPAYMENTS
PREPAYMENTS
LEARNING OBJECTIVES
LEARNING OBJECTIVES
To make adjustments for accrued &
To make adjustments for accrued &
prepaid expenses
prepaid expenses
To make adjustments for revenues owing
To make adjustments for revenues owing
& revenues received in advance
& revenues received in advance
To ascertain the actual amount of
To ascertain the actual amount of
expense & revenues in the Profit & Loss
expense & revenues in the Profit & Loss
Account
Account
To show the recording of accruals &
To show the recording of accruals &
prepayments in the Balance Sheet
prepayments in the Balance Sheet
INTRODUCTION
INTRODUCTION
In the trial balance, as far as expenses are
In the trial balance, as far as expenses are
concerned, it records only the expenses paid for
concerned, it records only the expenses paid for
the period.
the period.
So do the revenues where it records only the
So do the revenues where it records only the
revenues received during the period.
revenues received during the period.
Therefore, adjusting entries are made at the end of
Therefore, adjusting entries are made at the end of
the accounting period to ensure that revenues are
the accounting period to ensure that revenues are
recorded in the period in which they are earned, &
recorded in the period in which they are earned, &
expenses are recognized in the period which they
expenses are recognized in the period which they
are incurred.
are incurred.
This is to get the correct figure for net profit during
This is to get the correct figure for net profit during
the period.
the period.
TYPES OF ADJUSTING ENTRIES FOR NOMINAL
TYPES OF ADJUSTING ENTRIES FOR NOMINAL
ACCOUNTS
ACCOUNTS
Revenues & expenses
Revenues & expenses
accounts are considered as
accounts are considered as
nominal accounts. Adjusting
nominal accounts. Adjusting
entries for nominal accounts
entries for nominal accounts
can be classified into the
can be classified into the
following categories:
following categories:
Expenses
Expenses Revenues
Revenues
Prepaid
Prepaid
expenses or
expenses or
expenses paid
expenses paid
in advance
in advance
Revenues
Revenues
received in
received in
advance or
advance or
unearned
unearned
revenues
revenues
Accrued
Accrued
expenses or
expenses or
expenses owing
expenses owing
Accrued
Accrued
revenues or
revenues or
revenues
revenues
owing
owing
– Before making adjustments,
– Before making adjustments,
one must observed the
one must observed the
following:
following:
•
The accounting period
The accounting period
•
Any balances b/d at the
Any balances b/d at the
beginning of the year
beginning of the year
•Any balances b/d at the
Any balances b/d at the
end of the year
end of the year
•Amount actually paid
Amount actually paid
during the year
during the year
•Amount actually charged
Amount actually charged
to the TPL accounts during
to the TPL accounts during
the year
the year
PREPAID EXPENSES
PREPAID EXPENSES
Prepaid expenses are
Prepaid expenses are
payment of expenses
payment of expenses
that will benefit more
that will benefit more
than one accounting
than one accounting
period.
period.
Prepaid expenses often
Prepaid expenses often
occur with regard to
occur with regard to
Journal Entries:
Journal Entries:
Debit
Debit Credit
Credit
a)
a) To record the
To record the
expenses paid
expenses paid
Expenses
Expenses Bank /
Bank /
cash
cash
b)
b) To record the
To record the
adjusting entries
adjusting entries
Expenses
Expenses
Prepaid
Prepaid
Expenses
Expenses
c)
c) To transfer the
To transfer the
expenses incurred
Profit &
Profit &
Loss
Expenses
Expenses
