American International University – Bangladesh

BBA 1102
Principles of Accounting
Session 7
What we have discussed so far….

● Unadjusted trial balance fails to provide true picture

● Accounting period is the time frame for which we
evaluate business performance
● Periodicity assumption indicate the life of business is
divided into small parts to evaluate business
performance
● Adjusting entries are usually require at the end of
every accounting period
DISCUSSION TOPICS

Adjusting the accounts

▪ Adjusting entries
▪ Matching/Expense recognition principle
▪ Revenue recognition principle
▪ Worksheet
 Case of TeleTalk Company

Following is the trial balance of TeleTalk Company as on March 31, 2020. After
completing first quarter of operation the given balances are found from the company’s Other data:
ledger accounts.

Nature Debit Credit

1. Stock verification reveals only
A Cash $1,500 - $3,000 of office supplies is on hand.
A Accounts Receivable 15,500 -
A Office Supplies 7,700 -
2. Amount of unexpired insurance at
A Prepaid Insurance 5,000 - the end of the quarter is $1,500.
A Building 20,000 -
3. Interest on Mortgage Payable has to
A Equipment 13,000 -
A- Accumulated Depreciation – Equipment - $3,000 be recognized @ 12% per year.
L 12% Mortgage Payable (25% due in next quarter) - 20,000
4. Service provided but unbilled
L Accounts Payable - 5,500
I Service Revenue - 26,500 $2,500.
I Rental Income - 5,000
5. Annual depreciation on equipment
OE Capital - 30,200
OE- Drawing 5,000 -
is $2,000.
E Salary 15,000 -
E Repair Expense 7,500 -
Total $90,200 $90,200
 Adjusting Entries
Interest on Mortgage Payable has to be recognized @ 12% per year
TeleTalk Company
Trial Balance
as on March 31, 2020 Analysis:
Debit Credit ▪ You took a loan keeping something as mortgage (collateral)
Cash $1,500 -
Accounts Receivable 15,500 - ▪ You have utilized the fund and consumed benefit of the fund (known as
Office Supplies 7,700 - interest), thus should be treated as expense (understated).
Prepaid Insurance 5,000 -
Building 20,000 - ▪ The interest is not yet paid as well, thus a liability (understated) should
Equipment 13,000 - also be recognized
Acc. Dep - Equipment - $3,000
▪ The problem was, we do not journalize unless the transaction took place
12% Mortgage Payable - 20,000
Accounts Payable - 5,500 ▪ If this expense is not recognized, we are violating “MATCHING
Service Revenue - 26,500 PRINCILE” and the profit calculation will be incorrect. Similarly, we will
Rental Income - 5,000 report less liability than actual
Capital - 30,200
Drawing 5,000 - Journal Entry
Salary 15,000 -
Repair Expense 7,500 -
Total $90,200 $90,200 Interest expense Dr. 600
Interest payable Cr. 600
 Matching/Expense Recognition Principle

Expense Expense Expense

Income should match
Jan Feb Mar Apr May Jun Jul Aug Sep
with the expenses to
identify profit Income Income Income

× √ ×
ILLUSTRATION
Income: 8 x 15 = $120

Case 1
Case 1: PQS purchased 10 tables @ $5 each during April 2020. PQS sold 8 tables
during the month @ $15 each. How much profit PQS earned during the month? Expense: 8 x 5 = $ 40
Profit = $ 80
Case 2: PQS borrowed $50 from a bank with a condition to pay interest $5 per
month. PQS purchased 10 tables @ $5 each during April 2020. PQS sold 8 tables Income: 8 x 15 = $120

Case 2
during the month @ $15 each. How much profit PQS earned during the month? Expense: (8 x 5) + 5 = $ 45
Profit = $ 75
Case 3: Rai Rentals (RR) lend motor car. RR purchased a car for $1o,000 and
expect the car will run for 100,000 kilo meter (km). Mr. X rented the car from RR Income: 1 x 500 = $500

Case 3
to use it for 500 km for which RR charged him $1 per km. Mr. X will bear all the Expense: 0.1 x 500 = $ 50
cost of oil and gas. How much profit RR generated from Mr. X. Profit = $450
 Revenue Recognition Principle
Revenue should be Advance received Revenue/Income Due collection
recognized at the time Jan Feb Mar Apr May Jun Jul Aug Sep
revenue is earned (service
Service provided
provided) not when the
cash is received × √ ×
ILLUSTRATION

Case 1
Case 1: PQS sold 8 tables during April @ $15 each and collected the dues from April
customer in May. When should the sale be treated as income?

Case 2: PQS received $120 from a customer in March to sale 8 tables in April.

Case 2
PQS delivered the tables in April as promised. In which month, the revenue April
should be recognized?

Case 3: PQS sold 8 tables during April @ $15 each and collected $80 at the time

Case 3
of sale. The rest of the amount is collected in May When should the sale be treated April
as income and by how much? ($120)
 Adjusting Entries
Service provided but unbilled $2,500
TeleTalk Company
Trial Balance
as on March 31, 2020 Analysis:
Debit Credit ▪ Accountants do not record unless there is a document (known as source
Cash $1,500 - document, commonly called as invoice)
Accounts Receivable 15,500 -
Office Supplies 7,700 - ▪ As the bill was not prepared, it was not recorded. But the service has
Prepaid Insurance 5,000 - already been provided and thus, it should be treated as income for the
Building 20,000 - period (following matching principle)
Equipment 13,000 -
Acc. Dep - Equipment - $3,000 ▪ Here, income for the period is understated and similarly our claim from
12% Mortgage Payable - 20,000 customer (credit customers are ‘Account receivable’) is also understated
Accounts Payable - 5,500
Service Revenue - 26,500
Rental Income - 5,000
Capital - 30,200
Drawing 5,000 - Journal Entry
Salary 15,000 -
Repair Expense 7,500 -
Total $90,200 $90,200 Account receivable Dr. 2,500
Service revenue Cr. 2,500
 Adjusting Entries
Annual depreciation on equipment is $2,000
TeleTalk Company
Trial Balance
as on March 31, 2020 Analysis:
Debit Credit ▪ A part of the benefit from equipment has been consumed during the
Cash $1,500 - accounting period (known as depreciation), thus it should be treated as an
Accounts Receivable 15,500 -
expense (which is understated)
Office Supplies 7,700 -
Prepaid Insurance 5,000 - ▪ Total benefit consumed against the equipment (known as accumulated
Building 20,000 - depreciation) is also understated as it did not consider depreciation for
Equipment 13,000 - the current accounting period
Acc. Dep - Equipment - $3,000
12% Mortgage Payable - 20,000
Accounts Payable - 5,500 Assets should be recorded at the cost
Service Revenue - 26,500
Rental Income - 5,000 price [Historical cost principle]
Capital - 30,200
Drawing 5,000 - Journal Entry
Salary 15,000 -
Repair Expense 7,500 -
Total $90,200 $90,200 Depreciation expense Dr. 500
Accumulated depreciation Cr. 500
 Adjusting Entries

TeleTalk Company
Trial Balance
Trial(INCOMPLETE)
Balance
as on March 31, 2020 Adjusting Entries
Debit Credit Amount ($)
Cash $1,500 - Date Account titles Ref.
Accounts Receivable 15,500 - Debit Credit
Office Supplies 7,700 - Mar 31(1) Supplies expense Dr. 4,700
Prepaid Insurance 5,000 -
Office supplies Cr. 4,700
Building 20,000 -
Equipment 13,000 - 31(2) Insurance expense Dr. 3,500
Acc. Dep - Equipment - $3,000
Prepaid insurance Cr. 3,500
12% Mortgage Payable - 20,000
Accounts Payable - 5,500 31(3) Interest expense Dr. 600
Service Revenue - 26,500 Interest payable Cr. 600
Rental Income - 5,000
Capital - 30,200 31(4) Accounts Receivable Dr. 2,500
Drawing 5,000 - Service Revenue Cr. 2,500
Salary 15,000 -
31(5) Depreciation Expense Dr. 500
Repair Expense 7,500 -
Total $90,200 $90,200 Accumulated Depreciation Cr. 500
 Adjusted Trial Balance
Trial Balance Adjustments
Dr. Cr. Dr. Cr.
Cash $1,500 -
Accounts Receivable 15,500 -
Adjusting Entries
Office Supplies 7,700 - - 4,700
Prepaid Insurance 5,000 - Supplies expense Dr. 4,700
Building 20,000 - Office supplies Cr. 4,700
Equipment 13,000 -
Acc. Dep - Equipment - $3,000 Insurance expense Dr. 3,500
12% Mortgage Payable - 20,000 Prepaid insurance Cr. 3,500
Accounts Payable - 5,500 Interest expense Dr. 600
Service Revenue - 26,500
Interest payable Cr. 600
Rental Income - 5,000
Capital - 30,200 Accounts Receivable Dr. 2,500
Drawing 5,000 - Service Revenue Cr. 2,500
Salary 15,000 -
Depreciation Expense Dr. 500
Repair Expense 7,500 -
Supplies Expense - - 4,700 - Accumulated Depreciation Cr. 500

Total $90,200 $90,200

 Adjusted Trial Balance
Trial
Trial Balance
Balance (T. B.) Adjustments Adjusted T. B.
Dr. Cr. Dr. Cr. Dr. Cr.
Cash $1,500 - - - $1,500 -
Accounts Receivable 15,500 - 2,500 - 18,000 -
Adjusting Entries
Office Supplies 7,700 - - 4,700 3,000 -
Prepaid Insurance 5,000 - - 3,500 1,500 - Supplies expense Dr. 4,700
Building 20,000 - - - 20,000 - Office supplies Cr. 4,700
Equipment 13,000 - - - 13,000 -
Acc. Dep - Equipment - $3,000 - 500 - $3,500 Insurance expense Dr. 3,500
12% Mortgage Payable - 20,000 - - - 20,000 Prepaid insurance Cr. 3,500
Accounts Payable - 5,500 - - - 5,500 Interest expense Dr. 600
Service Revenue - 26,500 - 2,500 - 29,000
Interest payable Cr. 600
Rental Income - 5,000 - - - 5,000
Capital - 30,200 - - - 30,200 Accounts Receivable Dr. 2,500
Drawing 5,000 - - - 5,000 - Service Revenue Cr. 2,500
Salary 15,000 - - - 15,000 -
Depreciation Expense Dr. 500
Repair Expense 7,500 - - - 7,500 -
Supplies Expense - - 4,700 - 4,700 - Accumulated Depreciation Cr. 500
Insurance Expense - - 3,500 - 3,500 -
Interest Expense - - 600 - 600 -
Interest Payable - - - 600 - 600
Depreciation - - 500 - 500 -

Total $90,200 $90,200 $11,800 $11,800 $93,800 $93,800

 Assignment
The Mound View Motel opened business on May 1, 2008. Its trial balance before
adjustment on May 31 is as follows.
Debit Credit
Cash $3,500 -
Supplies 2,200 -
Prepaid Insurance 2,280 -
Land 12,000 -
Lodge 60,000 -
Furniture 15,000 -
Accounts Payable - $4,800
Unearned Rent - 3,300
Mortgage Payable - 35,000
Kevin Henry, Capital - 46,380 Prepare the adjusting entries for
Rent Revenue - 10,300 Mound View Motel for the month.
Advertising Expense 600 -
Salaries Expense 3,300 -
Utilities Expense 900 -
$99,780 $99,780
Other data:
(1) Prepaid insurance is a 1-year policy starting May 1, 2008.
(2) A count of supplies shows $750 of unused supplies on May 31.
(3) Annual depreciation is $3,000 on the lodge and $2,700 on furniture.
(4) The mortgage interest rate is 12%. (The mortgage was taken out on May 1.)
(5) Two-thirds of the unearned rent has been earned.
(6) Salaries of $750 are accrued and unpaid at May 31.
 Assignment

Submission Guideline
• Submit using MS Teams (DO NOT EMAIL). Go to the chat option, select new message and send
individual message (DO NOT POST YOUR ASSIGNMENT IN THE CLASS OF MS TEAMS).
• You can take a picture of your solution (handwritten with good format/tables and workings) to
submit your assignment. Your name and ID must be clearly stated in your submission.
Submission must be done by Tuesday (16.02.2021) on or before 11:59 pm.
• Any late submission will not be accepted.
• Any case of plagiarism will be handled strictly and may result F Grade in the course.
 Practice
Identify which accounts will be affected for the following adjustments? Also mention whether the account is overstated (OS) or understated
(US) for the given adjustments. [To conclude your answer use the following trial balance and the given format]

Debit Credit
Cash 3,700 - Answer Table
Supplies 2,200 - [Prepare a similar table on your notebook to write your answer]
Equipment 15,000 -
Account Receivable 3,000 - Affected account 1 Status Affected account 2 Status
Notes Payable - 3,000
Service Revenue - 12,000 1.  OS  US  OS  US
Unearned Revenue - 2,100
Prepaid Insurance 5,000 - 2.  OS  US  OS  US
Salary 6,200 -
3.  OS  US  OS  US
Adjustment information:
1. Supplies on hand $800 4.  OS  US  OS  US
2. Amount of unexpired insurance is $600
3. Service provided but unbilled and unrecorded $1,200 5.  OS  US  OS  US
4. Purchase of furniture has been incorrectly recorded
as equipment by $900
5. Unearned service revenue has been earned by $550 You need not to submit this task. Keep the
at the end of the period solved copy in your notebook for future use