CO5117 Introduction to Accounting

Topic 6 2013

Revision Week 5

CO5117 Introduction to Accounting

Lecture 6 Accrual Accounting
Ref Ch 3 Carlon et el

Internal control Bank reconciliation process Receivables : Treatment of bad debts Types of receivable Accounting for receivables

Lecture Overview

Accrual vs Cash Accounting

Cash vs Accrual Accounting The need for balance day adjustments Types of Balance Day adjustments prepayments accruals Closing entry process Use of worksheets

Accrual-based accounting Revenue recognised when goods & services are provided Expenses recognised when assets are consumed or liabilities incurred Cash-based accounting Revenue recognised when the cash is received or paid. Expenses recognised when the cash is received or paid

Accrual vs Cash Accounting - example

Year 1 - Paid $50,000 for purchased paint & paid employees Year 2 - Received $80,000 cash for work done in Year 1

Revenue & Expense Recognition Criteria

Assumption of going concern Accounting period - divides the economic life of a business into artificial time periods Relationships exist between revenue recognition expense recognition period assumption Also remember need to consider not only the definition but the recognition criteria probably occurrence & reliable measurement!!

CO5117 Introduction to Accounting

Topic 6 2013

The Need for Adjusting Entries

Review - The Accounting Cycle

Transactions Financial Statements Documents

Many transactions cross over accounting periods or have not been recorded & should be if financial reports are going to produce relevant & reliable information for decision making. Adjusting Entries: Are prepared to adjust account balances to their proper amounts for the financial reports. Are prepared at the end of the of the reporting period, either interim or annual depending on the business requirements for reporting information Interim adjusting entries are prepared on a worksheet & at the end of reporting period, balance day adjustments are recorded formally in the General Journal & posted to the General Ledger.
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Post Cl T.Bal

Journals

Closing Entries

Ledger

Adj T.Balance BDAs

Trial Balance
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Types of adjusting entries

Prepayments 1. Prepaid expenses: Amounts paid in cash & recorded as assets until used 2. Revenue received in advance: Amounts received from customers & recorded as a liability until services performed or goods delivered Key determine how it was initially recorded, identify what you should have now & then adjust!! Accruals 1. Accrued revenues: Amounts not yet received & recorded for which goods or services have been provided 2. Accrued expenses: Amounts not yet paid or recorded for goods or services already received
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Prepayments Example #1
Business purchased a 1 year insurance policy on 1 April for $13,200 incl. GST. The financial year ends 30 June. 1/4 Dr Prepaid Insurance 12,000 Dr GST Outlays 1,200 Cr Bank 13,200 Paid 1 year insurance policy At 30 June, have used 3 months insurance & have an asset remaining for 9 months but accounts show no expense & 12 months asset. Adjust! 30/6 Dr Insurance Expense 3,000 Cr Prepaid Insurance 3,000 BDA to record insurance used during financial year.

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Prepayments Example #1 - Posting to the General Ledger

Prepaid Insurance
Date Apr 1 Details Bank DR 12,000 3,000 CR Balance 12,000 Dr 9,000 Dr

Prepayments Example #2
Business purchased a 1 year insurance policy on 1 April for $13,200, (incl. GST) it is the policy of the business is to record initially as an expense. The financial year ends 30 June. 1/4 Dr Insurance Expense 12,000 Dr GST Outlays 1,200 Cr Bank 13,200 Paid 1 year insurance policy At 30 June, have used 3 months insurance exp & have an asset remaining for 9 months but accounts show exp & no asset. Adjust! 30/6 Dr Prepaid Insurance 9,000 Cr Insurance Expense 9,000 12 BDA to adjust and record prepaid insurance

Jun 30 Insurance Exp

Insurance Expense
Date Details DR 3,000 CR Balance 3,000 Dr Jun 30 Prepaid Insur

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CO5117 Introduction to Accounting

Topic 6 2013

Prepayments Example #2 - Posting to the General Ledger

Office Supplies
Supplies / Office Supplies are generally purchased in bulk throughout the year, and used as needed by staff in the business. Office Supplies are recorded as an asset, they have future economic benefit in being able to be used to complete work when needed. Similar to inventory, at the end of the reporting period, there is often supplies that have not been used. A physical stocktake is performed to identify the amount of supplies on hand.
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Insurance Expense
Date Apr 1 Details Bank DR 12,000 9,000 CR Balance 12,000 Dr 3,000 Dr

Jun 30 Insurance Exp

Prepaid Insurance
Date Details DR 9,000 CR Balance 9,000 Dr Jun 30 Insurance Exp

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Office Supplies cont.

Example - Opening balance of office supplies on hand is $500. At 30 June, count of stationery on hand is $200. Adjust. 30/6 Dr Stationery Expense 300 Cr Stationery on Hand 300 To record stationery used during year.

Depreciation

Stationery on hand 1/7 Bal 500 30/6 Stationery 300 Exp Bal end 200 500 500

Stationery Exp 30/6 Stationery On hand 300 P&L 300

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Op Bal 200

Allocates a portion of the cost of an asset against revenue over the assets estimated useful life. Requires recognition of an expense & reduction in the value of the asset to a contra asset account called Accumulated Depreciation. This account increases / accumulates over a period of time, ref. p.162 Information required for calculation of depreciation - cost of the asset, estimated residual value, estimated useful life & method of depreciation. Straight Line Depreciation - the expense is charged equally over the life of the asset. Annual Depreciation = Cost Residual Value / Useful Life Example Buy Plant & Equipment 1/7/2006 for $80,000. Useful life of 8 years then scrap - no residual value. 16 $80,000 0 / 8 = $10,000 expense p.a.

Depreciation cont.

Unearned Revenue
10,000 10,000 Classified as a deferral Cash has been received in advance of earning revenue. Recorded as current liability (Unearned Revenue, Revenue Received in Advance) until the service / goods are provided. Example: 5 May Customer paid $1,100 (GST incl.) for goods that need to be specially ordered by the business. 10 June the goods arrived & were delivered to the customer. 5/5 Dr Bank 1,100 Cr GST Collections 100 Cr Unearned Revenue 1,000 Customer paid for goods before receiving them 10/6 Dr Unearned Revenue 1,000 Cr Sales 1,000 18 Delivery of goods paid in advance of delivery

BDA Journal entry: Dr Depreciation Expense Cr Accumulated Depreciation Depreciation exp for year.

Income Statement To determine profit Shown in Statmt Fin Position as: Plant & Equipment Less Accum Depn 80,000 10,000 70,000

Note: other depreciation methods will be covered in lecture for topic 8

Carrying amount, WDV, NBV or Book value

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CO5117 Introduction to Accounting

Topic 6 2013

Unearned Revenue - Posting to the General Ledger

Unearned Revenue
Date Details DR CR 1,000 1,000 Balance 1,000 Cr 0 May 5 Bank Jun 10 Sales

Accruals Unrecorded Expenses

Identifying expenses that have been incurred during the reporting period, but will not be paid until the next reporting period. Example: Wages $500 are paid on Friday, but the reporting period ends on Wednesday. Prepare the BDA. Dr Wages Expense 300 Cr Wages Payable 300 Entry to record wages owing at end of financial year Wages Payable recorded in Balance Sheet
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30/6 Sales
Date Details DR CR 1,000 Balance 1,000 Cr Jun 10 Unearned Rev.

Wages Expense recorded in Income Statement

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Accruals Expenses - Posting to the General Ledger

Wages Expense
Date Details DR CR Balance 50,000 Dr 300 50,300 Dr Jun 25 Bal Jun 30 Wages Payable

Accruals - Unrecorded or Accrued Revenue

Occurs when service has been provided but cash will not be received until the following period, eg interest earned, commissions earned, unbilled revenues. Example: April 1 $10,000 invested in 12 month term deposit with ANZ at 5% interest p.a. = $500 p yr At 30 June recognise: 30/6 Dr Interest Receivable 125 Cr Interest Revenue 125 Interest owing for 3 months on term deposit

Wages Payable
Date Details DR CR 300 Balance 300 Cr Jun 30 Wages Expense

Current Asset in Balance Sheet

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Revenue in Income Statement

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Accrued Revenue - Posting to the General Ledger

Interest Receivable
Date Details DR 125 CR Balance 125 Dr Jun 30 Bank

Summary of Adjusting Entries

Ref Fig 3.17 pg 171: Table summarising the type of BDA, required adjusting entry & the results of not making the adjustment Ref figs 3.18 & 19 pgs 171 - 173 Summary of adjusting entries & postings to the ledger account for Wong Pty Ltd - the examples used throughout chapter 3!!

Remember BDA rules !

Interest Revenue
Date Details DR CR 125 Balance 125 Cr Jun 30 Interest Receiv.

Your Turn: Journalise the adjusting entries for PSA 3.1 pg 195 & 196
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CO5117 Introduction to Accounting

Topic 6 2013

The Accounting Cycle - expanded

Transactions Financial Statements Documents

The adjusted Trial Balance & Financial Statements

Adj T.Balance

Need to prepare

Journals

completed

Ledger

BDAs Trial Balance

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The adjusted trial balance is prepared after all adjusting entries have been made It is used to prove the equality of total debit balances & total credit balances after the adjusting entries have been made The adjusted trial basis is the main basis for preparation of the financial statements Ref figs 3.20 & 3.21 pgs 174 & 175
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Closing the Books

Preparing closing entries

Temporary accounts relate to only a given accounting period i.e., revenues, expenses, dividends Permanent accounts are carried forward to future accounting periods i.e., assets, liabilities, equity Closing entries are used to transfer the temporary account balances to the permanent equity account, retained earnings This will produce a zero balance in each temporary account Error if revenues & expenses have balances, the net profit for the next accounting period will be under / overstated due to the inclusion of revenue / expense from the previous period. Remember relevant & reliable info for decision making!! 27

Close all revenue accounts to the Income Summary or Profit & Loss Summary Close all expense accounts the Income Summary / P&L Summary The Income Summary is closed to Retained Earnings (companies) or Capital (sole trader) Dividends (company) or Drawings (s.trader) are closed to Retained Earnings (company) or Capital (s.trader).

This will result in all temporary accounts having a closing 28 balance of zero

Preparing a post-closing trial balance

Interim Financial Statements & the Use of a Worksheet

A post-closing trial balance is a list of all permanent accounts and their balances after closing entries are journalised & posted The purpose of the post-closing trial balance is to prove the equality of the permanent accounts that are carried forward to the next accounting period

Prepare Closing entries for PSA3.1 pg 195 & 196

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Preparation of financial statements are a long & complex process Internal decision-making is frequent & timely A worksheet can be used to assemble all information in one place. Reduce the need to formally record the balance-day adjustments & closing entries in the General Journal & General Ledger for the preparation of Interim Financial Statements A worksheet is working papers only and not a formal report!!

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CO5117 Introduction to Accounting

Topic 6 2013

Interim Financial Statements & the Use of a Worksheet cont.

Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet

Interim Financial Statements & the Use of a Worksheet cont.

Account Name:

Dr

Cr

Dr

Cr

Dr

Cr

Dr

Cr

Dr

Cr

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Trial Balance columns Ledger balances after transaction entries, DR = CR Balance-Day Adjustment columns Entries to record adjustments required, DR = CR Adjusted Trial Balance columns Sum of trial bal plus adjustments columns, DR = CR Income Statement All revenues & expenses DR = CR due to NP or NL, this is the balancing figure!! Balance Sheet All assets, liabilities & owners equity Again DR = CR, NP or NL will be the balancing figure!!

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Worksheet

Summary

Cash vs Accrual Revisited the accounting cycle Need for balance day adjustments Types of balance day adjustments Closing entries Use of worksheets

Next Week
You will be required to do a w/sheet in the practice set!!

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MID SEMESTER TEST ???????? Venue: ????? Covering topics 1 to 5 10 minutes reading time plus test is 1 hour in duration!!

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