AAA015: TOPIC 5 2021/2022

KOLEJ MATRIKULASI LABUAN

ACCOUNTING 1: AA015

Topic 5 : Adjustment at The End of Accounting Period

Learning Outcomes

5. 1 Describe the basis of accounting: cash basis and accrual basis

5.2 Define revenues and expenses and explain their effects on owner’s equity.
5.3 Record revenues and expenses.
5.4 Describe the differences between revenue expenditures and capital expenditures.
5.5 Describe the form of reporting of revenues and expenses in statement of comprehensive
CHAPTER 3: THE ACCOUNTING CYCLE
income and or statement of profit or loss.
5.6SPECIAL
Describe the purpose for adjustment at the end of accounting period under accrual
JOURNALS
basis.
5.7The four
Describe, calculate
categories and record
of special the adjustment at the end of accounting period as
journals:
follows:
Sales5.7.1
Journal
Unearned revenues. to record all sales of merchandise on
5.7.2 Accrued revenues. credit
Purchases Journalexpenses.
5.7.3 Prepaid to record all purchases of merchandise
on credit.
5.7.4 Accrued expenses/expenses payable.
Cash receipts journal to record all receipts by cash and
5.7.5 Depreciation expenses cheques.
5.7.6 Bad debts
Cash payments journal expenses. to record all payments made by cash or
5.8 Describe two types of errors , i.e. errorscheques.
affecting trial balance and errors not affecting
trial balance
5.9 Prepare the adjusted trial balance.
GENERAL
5.10 Prepare JOURNAL
statement of comprehensive income/ profit or loss, statement of owner’s equity
and statement of financial position based on the adjusted trial balance.

1
 AAA015: TOPIC 5 2021/2022

5. 1 Describe the basis of accounting: cash basis and accrual basis

Cash-Basis Accrual-Basis

a. Revenues recognized when a. Transactions in the periods in

cash is received. which the events occur.

b. Expenses recognized when b. Companies recognize revenues

cash is paid. when they perform services
(rather than when they receive
cash).

c. Cash-basis accounting is not c. Expenses are recognized when

in accordance with generally incurred (rather than when
accepted accounting paid)
principles (GAAP).

d. In accordance with generally

accepted accounting principles
(GAAP).

5.2 Define revenues and expenses and explain their effects on owner’s equity.
5.3 Record revenues and expenses
Revenues Expenses
Definition Acquisition of business through Cost of services /goods used to
the sale of goods / services. generate revenue.
Gross increase in owner’s equity Decreases in owner’s equity that result
resulting from business activities from operating the business
entered into for the purpose of
earning income.
Operating Revenues: Operating Expenses:
1.The results obtained from core 1. Expense directly attributable
business activities. Eg. Sales of primarily engaged in business.
inventories / Service Revenue Eg:Transportation costs, wages,
2. Other revenues: rent and salaries
Results are not related to the 2. Non Operating expenses:
main activity. i.e: Interest Expenses that are not directly
Revenue, Dividends Revenue related to the main activity.
Eg: Bank Loan Interest, Loss
on Disposal of Vehicles

2
 AAA015: TOPIC 5 2021/2022

Concepts Revenue Recognition Concepts Recognition Expenses Concepts

Effects Increase in Owner’s equity Decrease in Owners Equity

on
Owner’s
Equity
GAAP Revenue Recognition Principle Expense Recognition Principle

5.4 The differences between revenue expenditures and capital expenditures.

Revenue Expenditures Capital Expenditures

1. Any expenses incurred to 1. Any expenses incurred to
maintain the assets in working acquire non-current asset or to
condition and for the operation of improve the non-current assets
the business. value.

2. Decrease the business profit 2. Do not affect the business profit

The benefits from the expenses but the value of non-current
will be received once only for the assets will be increase in the
current period. financial positions.
3. The benefits from the expenses 1. The benefits from the expenses
will be received once only for the will be received not only for the
current period. current period, but over a period
of more than one year.
2. Reported in the Statement of 4. Reported in the statement
Comprehensive Income of financial position

5. i.e : Repairs of furniture, 3. i.e : Purchase of machinery,

Purchase of stationery, Salaries, Fees paid for installation of
rental and etc. machinery, renovations of
building and etc.

3
 AAA015: TOPIC 5 2021/2022

5.5 Describe the form of reporting of revenues and expenses in statement of

comprehensive income and or statement of profit or loss.

5.6 Describe the purpose for adjustment at the end of accounting period under accrual
basis.
a) To ensure that the revenue recognition and expense recognition
principles are followed.
b) To ensure that financial statements prepared are complete :
i. Net profit presented are not under or overstated (Comprehensive
Income Statement) or
ii. Assets, Liabilities and Owner’s Equity are not under or overstated
(Financial Positions Statement)

5.7 Describe, calculate and record the adjustment at the end of accounting period as
follows:

5.7.1 Unearned revenues.

a. Receipt of cash that is recorded as a liability because the service has
not been performed.
b. Often occurs in regard to :

4
 AAA015: TOPIC 5 2021/2022

i. Rent
ii. Airline tickets
iii. Magazine subscriptions
iv. Customers’ deposits
c. Adjusting entry is made to record the revenue for the services
performed during the period and to show the liability that remains at
the end of the period.

Dr Unearned Service Revenue XXX

Cr Service Revenue XXX

OR
Dr Service Revenue XXX
Cr Unearned Service Revenue XXX

5
 AAA015: TOPIC 5 2021/2022

Example 1
Pioneer Advertising received RM1,200 on October 21st 2017 from R. Knox for
advertising services expected to be completed by 31st January 2018.
Unearned Service Revenue shows a balance of RM1,200 in the trial balance
as at 31st December 2017. Analysis reveals that the company performed
RM800 of services in 2017.

Dr Unearned Service Revenue 800

Cr Service Revenue 800

Example 2
Pioneer Advertising received RM1,200 on October 2 nd, 2017 from R. Knox for
advertising services expected to be completed by Januari 31 st,2018. Service
Revenue shows a balance of RM1,200 in the trial balance as at 31st December
2017 Analysis reveals that the company performed RM700 of services in 2017.

Dr Service Revenue 500

Cr Unearned Service Revenue 500

3.7.2 Accrued revenues.

a. Revenues for services performed/ goods sold but not yet received in
cash or recorded.
b. Accrued revenues often occur in regard to:
i. Rent
ii. Interest
iii. Services
c. Adjusting entry shows the receivable that exists and records the
revenues for services performed.

Dr Accrued Revenue XXX

Cr Revenue XXX

Example 3:
As of 31st December 2017, there was RM500 rental revenue has not been
recorded by Pioneer Advertising.

Dr Accrued Rental Revenue 500

Cr Rental Revenue 500

6
 AAA015: TOPIC 5 2021/2022

Example 4:
In December 2017, Pioneer Advertising performed services worth RM2000 that
were not billed to clients.
Dr Accrued Service Revenue 2000
Cr Service Revenue 2000

3.7.3 Prepaid expenses.

a. Payment of cash, that is recorded as an asset to show the service
or benefit the company will receive in the future.

b. Prepayments often occur in regard to:

i. insurance
ii. supplies
iii. advertising
iv. rent
v. equipment
vi. buildings

c. Expire either with the passage of time or through use.

d. Adjusting entry: Increase (debit) to an expense account and
Decrease (credit) to an asset account.

Dr Insurance Expense XXX

Cr Prepaid Insurance XXX
OR
Dr Prepaid Insurance XXX
Cr Insurance Expense XXX

Dr Supplies Expense XXX

Cr Supplies XXX
OR
Dr Supplies XXX
Cr Supplies Expense XXX

7
 AAA015: TOPIC 5 2021/2022

Supplies ( expire through use)

Example 5:
Pioneer Advertising purchased supplies costing RM2,500 on October 5 th , 2017.
Pioneer recorded the payment by increasing (debiting) the asset Supplies. This
account shows a balance of RM2,500 as at 31 st December 2017 in the trial
balance. An inventory count at the close of business on 31st December reveals
that RM1,000 of supplies are still on hand.

Dr Supplies Expense 1500

Cr Supplies 1500

Supplies ( expire through use)

Example 6:
Pioneer Advertising purchased supplies costing RM2,500 on October 5 th , 2017.
Pioneer recorded the payment by increasing (debiting) the Supplies Expense.
This account shows a balance of RM2,500 as at 31st December 2017 in the trial
balance. An inventory count at the close of business on 31st December reveals
that RM1,500 of supplies has been used.

Dr Supplies 1000
Cr Supplies Expense 1000

Insurance (expire within the passage of time)

Example 7:
On October 4th , Pioneer Advertising paid RM600 for a one-year fire insurance
policy. Coverage began on October 1. Pioneer recorded the payment by
increasing (debiting) Prepaid Insurance. This account shows a balance of
RM600 in the trial balance as at 31st December 2017.

Dr Insurance Expense 150

Cr Prepaid Insurance 150

8
 AAA015: TOPIC 5 2021/2022

Insurance (expire within the passage of time)

Example 8:
On October 4th , Pioneer Advertising paid RM600 for a one-year fire insurance
policy. Coverage began on October 1st . Pioneer recorded the payment by
increasing (debiting) Insurance Expense . This account shows a balance of
RM600 in the trial balance as at 31st December 2017.

Dr Prepaid Insurance 450

Cr Insurance Expense 450

3.7.4 Accrued expenses/expenses payable.

a. Accrued expenses often occur in regard to:
i. Rent
ii. Interest
iii. Taxes
iv. Salaries
b. Adjusting entry records the obligation and recognize the expense.
c. Adjusting entry: Increase(debit) an expense account and increase
(credit) a liability accounts.

Dr Expense XXX
Cr Accrued Expense XXX

Accrued Salaries and Wages

Example 9:
Pioneer Advertising paid salaries and wages on first day every month. Worker’s
salaries in December amounted to RM2,000 will be paid on the 1 st January.

Dr Salaries Expense 2,000

Cr Accrued Salaries Expense/ Salaries Payable 2,000

9
 AAA015: TOPIC 5 2021/2022

3.7.5 Depreciation expenses

a. Buildings, equipment and motor vehicles ( assets that provide
service for many years) are recorded as assets, rather than an
expense on the date acquired.
b. Depreciation is the process of allocating the cost of an asset to
expense over its useful life.
c. Adjusting entry:

Dr Depreciation Expense- Asset XXX

Cr Accumulated Depreciation- Asset XXX

Example 10:
For Pioneers Advertising assume that depreciation on the equipment is RM500 a
year.
Dr Depreciation Expense- Equipment 500
Cr Accumulated Depreciation- Equipment 500

✓ Accumulated depreciation is called a contra asset account.

✓ Offsets related asset account on the balance sheet.
✓ Book value is the difference between the cost of any depreciable asset and
its accumulated depreciation.

5.7.6 Bad debts expenses.

a. Definition: a bad debt is a debt by a customer (an asset to the
business) that is almost certain cannot be collected. Whenever a bad
debt occurs, the debtors account should be closed.
b. There are many reasons why a bad debt can occur. Among them
are:
i. The debtor may have passed away.
ii. The debtor may have become bankrupt.
iii. The debtor may have disappeared and cannot be contacted.
c. Adjusting entry:

Dr Bad Debts Expense XXX

Cr Account Receivables XXX

10
 AAA015: TOPIC 5 2021/2022

Example 11:
On December 31st , the company has been successfully identified that a debtor
named Badrul has gone bankrupt and unable to pay its debts RM 1,000.

Dr Bad Debts Expense 1,000

Cr Account Receivables-Badrul 1,000

3.8 Describe two types of errors , i.e. errors affecting trial balance and errors not
affecting trial balance.
Errors affecting trial balance Errors not affecting trial balance
1. An error in the journal ( the entry 1. Omissions of transaction
has not yet been posted) 2. Mistake misstated.
2. Journal entry is correct, however 3. Reciprocity Errors
you made a mistake while posting 4. Accounts Error (principle)
to the ledger.
3. Error in a journal entry that has
already been posted.

5.9 Prepare the adjusted trial balance.

5.10 Prepare statement of comprehensive income/ profit or loss, statement of
owner’s equity and statement of financial position based on the adjusted trial
balance.

Practice 1:
SmartShop Enterprise
Trial balance
June 30th , 2021

Accounts Debit(RM) Credit(RM)

Cash 7,430
Inventory 8,900
Accounts receivable 4,300
Supplies 2,250
Vehicles (cost) 70,000
Accumulated Depreciation - Vehicles 26,500
Furniture (cost) 10,000
Accumulated Depreciation - Furniture 4,000

11
 AAA015: TOPIC 5 2021/2022

Accounts Payable 1,100

Capital 60,000
Unearned Rental Revenue 2,500
Drawings 6,500
Sales 74,400
Sales return and allowances 3,300
Sales discounts 1,400
Purchases 40,900
Purchase returns and allowances 4,200
Purchase discounts 2,100
Rental expense 9,000
Insurance Expense 600
Vehicle Maintenance Expense 1,600
Advertising expense 4,000
Freight in 400
Freight out 300
Utilities Expense 2,800
Miscellaneous expense 1,120
Total 174,800 174,800

Additional information :
1. The ending inventory as at 30th June 2021 is RM8,700.
2. Part of the unearned rental revenue of RM2,000 has been recognized in the
current year.
3. On 28th June 2021, merchandise was sent to customers valued at RM3,500 but
cash has not been received yet.
4. Insurance expense is for a half-year period beginning 1st March 2021.
5. Supplies on hand at June 30th are RM1,500.
6. Advertising expense of RM300 has not been recorded and will not be paid until
next month.
7. Furniture is depreciated 20% per annum on straight line basis.
8. Annual depreciation is RM8,750 on vehicles .
9. Debtors ( Hamid Company) were found bankrupt and their debts of RM390 were
written off.
10. A withdrawal of RM500 has been recorded as a miscellaneous expense.

Required:
a) Prepare the adjusting entries for the above transactions.
b) Prepare a Statement of Comprehensive Income for the year ended 30 th June 2021.
c ) Prepare a Statement of Financial Position as at 30th June 2021.

12
 AAA015: TOPIC 5 2021/2022

Solutions:
a) Perniagaan SmartShop
Date Particulars Debit (RM) Kredit(RM)
2021 Unearned Rent Revenue 2,000
June 30 Rent Revenue 2,000
(to record adjustment of Unearned Rental Revenue)
Accounts receivable 3,500
Sales 3,500
(To record credit sales)
Prepaid Insurance 200
Insurance Expense 200
(To record prepaid insurance)
Supplies expense 750
Supplies 750
(To record office supplies used)
Advertising expense 300
Advertising payable 300
(To record advertising payable)

Depreciation expense – Furniture 2,000

Accumulated Depreciation - Furniture 2,000
(To record depreciation on furniture)
Depreciation expense- Vehicles 8,750
Accumulated Depreciation - Vehicles 8,750
(To record depreciation on vehicles)
Bad debt expense 390
Accounts receivable -Syarikat Hamid 390
(To record bad debt)
Drawings 500
Miscellaneous expense 500
(To record correcting entries on drawings)

13
 AAA015: TOPIC 5 2021/2022

Perniagaan SmartShop
Statement of Comprehensive Income
For The Year Ended 30th June 2021
RM RM RM
Sales (RM74,400 + RM3,500) 77,900
- Sales Return and Allowance (3,300)
- Sales Discount (1,400)
Net Sales 73,200
Less: Cost of Goods Sold
Beginning Inventory 8,900
+ Purchases 40,900
- Purchase Returns and Allowances (4,200)
- Purchase discount (2,100)
Net Purchases 34,600
+ Freight- in 400 35,000
Cost of Goods Available For Sale 43,900
- Ending Inventory 8,700
Cost of Goods Sold (35,200)
Gross profit 38,000
- Operating Expenses:
Rent expense 9,000
Insurance Expense (600 – 200) 400
Vehicle Maintenance Expense 1,600
Advertising expense (4,000 + 300) 4,300
Freight- out 300
Utilities expense 2,800
Miscellaneous expense (1,120 – 500) 620
Supplies expense 750
Depreciation Expense - Furniture 2,000
Depreciation Expense - Vehicles 8,750
Bad Debt Expense 390 (30,910)
7,090
Rent Revenue 2,000
Net Profit 9,090

14
 AAA015: TOPIC 5 2021/2022

Perniagaan SmartShop
Statement of Financial Position
As at 30th June 2010
RM RM RM
ASSETS
Non Current Assets
Vehicles (cost) 70,000
-Accumulated Depreciation-Vehicles (26,500+ 8,750) (35,250) 34,750
Furniture (cost) 10,000
- Accumulated Depreciation-Furniture (4,000+ 2,000) (6,000) 4,000
Total Non Current Assets 38,750
Current assets
Cash 7,430
Accounts Receivable (4,300 + 3,500) -390 7,410
Inventory 8,700
Supplies (2,250 – 750) 1,500
Prepaid Insurance 200
Total Current Assets 25,240
Total Assets 63,990
Owner’s Equity
Beginning capital 60,000
+ Net Profit 9,090
69,090
-Drawings (7,000)
Ending capital 62,090
Liabilities
Accounts payable 1,100
Unearned Revenue 500
Advertising payable 300
Total liabilities 1,900
Total liabilities and owner’s equity 63,990

15