 ACCOUNTING ENVIRONMENT

 ACCOUNTING CONCEPT & PRACTICE

 THE RECORDING PROCESS
 COMPLETING THE ACCOUNTING CYCLE
 ACCOUNTING FOR MERCHANDISING BUSINESSES
 COMPANIES ANNUAL REPORT
 FINANCIAL STATEMENT ANALYSIS
 MANAGERIAL ACCOUNTING
 COST VOLUME PROFIT ANALYSIS (CVP)
 BUDGETING AS A TOOL FOR PLANNING &
CONTROLLING
 VARIANCE ANALYSIS & STANDARD COSTING
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 Adjusting entries
 Preparing the adjusted trial balance
 Closing entries
 Preparing the financial statement
 Statement of Profit or Loss and Other
Comprehensive Income
 Statement of Owner’s Equity
 Statement of Financial Position

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 Adjusting entries are journal entries that are

typically required to be prepared at the
end of accounting period to adjust the
amount or balance of certain items or
accounts.
 Common examples of items or accounts
that required to be adjusted are
depreciation of assets, accrued expenses,
or unearned revenue.

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 revenue and expenses are
Accrual recognized at the time they
take place, and not at the
time they are actually paid.

revenue is recorded when cash

Cash-basis is received, and expenses are
recorded when cash is paid.

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 REVENUE revenue be recognized in the
RECOGNITION accounting period in which it
PRINCIPLE is earned.

efforts (expenses) be matched

THE MATCHING with accomplishments
PRINCIPLE
(revenues).

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 Adjusting entries are prepared to update

the balance of particular accounts to its
latest or correct balance at the end of
accounting year.
 Basically, there are two broad categories
of items that require to be adjusted that
are prepayments and accruals.

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 Four types of items/accounts that required

to be adjusted:
 prepaid expenses,
 unearned revenues,
 accrued revenues, and
 accrued expenses

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 Prepaid expenses
 Expenses that have been paid in advance by a
company to other party.
 Prior to adjustment the value of
assets are overstated and
expenses are understated.
 The adjusting entry results in debit to an expense
account and credit to an asset account.
 Examples of prepaid expenses are cash paid by a
company for insurance premiums, or rental paid
prior to receiving services from the other party
(seller).
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Prepaid expenses Expenses Account Debit
Assets Account Credit
Example:
Insurance premium of RM600 out of RM1,200 paid several
months ago has just expired this month.
Entry when the insurance premium was paid:
Dr. Prepaid insurance 600
Cr. Cash 600

Adjusting entry:
Dr. Insurance expense 600
Cr. Prepaid insurance 600

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 Unearned revenues
 Revenue that has been collected in advance from
customer prior to rendering services to the customers.
 Prior to adjustment the value of
assets are overstated and
revenues are understated.
 The adjusting entry results in debit to a liability account
and credit to a revenue account.
 Examples of unearned revenues are cash collected
for magazine subscription, hotel room or flight booking
payment and rental prior to rendering services to the
clients.
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Unearned revenues Liability Account Debit
Revenue Account Credit
Example:
Service relating to fee of RM500 (out of the advance payment of
RM1,500 made by customers last month) have been rendered to
the customers.
Entry when recording payment by customer:
Dr. Cash 1,500
Cr. Unearned service revenue 1,500

Adjusting entry:
Dr. Unearned service revenue 500
Cr. Service revenue 500

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 Accrued revenues
 Revenues that have been earned as services had
been performed to the customers but not
recorded or bill yet.
 Prior to adjustment the balance of affected
accounts (assets and revenues) are understated.
 In order to adjust the affected accounts, an asset
account needs to be debited while a revenue
account shall be credited.
 Examples of accrued revenues are fees receivable
and rent receivable.
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Accrued revenues Assets Account Debit

Revenue Account Credit

Example:
Service revenue earned but unbilled on 31 December 2016 is
RM2,700.

Dr. Account receivable 2,700

Cr. Revenue 2,700

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 Accrued expenses
 Expenses that are already incurred but yet to be
paid.
 Prior to adjustment the balance of affected
accounts (liability and expense) are understated.
 In order to adjust the affected accounts, an
expense account needs to be debited while a
liability account shall be credited.
 Example of accrued expenses is salary and rent
payable.

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Accrued expenses Expense Account Debit

Liability Account Credit

Example:
Rent for December 2016 was RM650 but not paid and
recorded yet.
Dr. Rent expense 650
Cr. Rent payable 650

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 Is prepared after all adjusting entries have

been journalized and posted. T
 he purpose of preparing the adjusted trial
balance is to prove the equality of the
total debit and credit balances in the
ledger after all adjustments have been
made.
 Financial statements could be prepared
directly from the adjusted trial balance.

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 For the purpose of preparing the closing entries

accounts are classified into two categories:
 temporary accounts; and
Temporary accounts consist of revenues,
expenses as well as drawings account.
 permanent accounts
Permanent accounts comprise of assets, liabilities
and equity accounts.
 Closing entries are prepared by transferring balance
of all temporary accounts to the owner’s capital
account.
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Accounts Journal entry

1 Revenues Dr. Revenue Account
Cr. Income Summary
2 Expenses Dr. Income Summary
Cr. Expense Account
3 Income Summary - Dr. Income Summary
Profit Cr. Owner’s Capital

Income Summary - Dr. Owner’s Capital

Loss Cr. Income Summary
4 Drawings Dr. Owner’s Capital
Cr. Drawings Account
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POP QUIZ:
1. An account that still has balance after closing
entries have been journalized and posted is:

A. Service Revenue
B. Advertising expense
C. Prepaid Insurance
D. Depreciation expense

2. Which types of accounts will appear in the post-

closing trial balance?

A. Accrued expenses
B. Unearned revenue
C. Accumulated depreciation
D. All of the above
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STRUCTURED QUESTION:
Syomio Enterprise provides health and beauty consultation
services. The company is located in Klang Valley. The following
are unadjusted accounts balances for the financial year ended
31 December 2016:
Account RM
Cash 44,470
Account receivable 103,770
Office supplies 10,800
Prepaid utilities 21,700
Prepaid insurance 16,800
Office equipment 69, 360
Accumulated depreciation- Office
equipment 8,800
Unearned revenue 59,700
Capital 155,600
Service revenue 81,360
Salary expense 38,560
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STRUCTURED QUESTION:
Additional information:

 Supplies on hand at 31 December 2016 was RM5,800.

 Prepaid insurance represented premiums for policy purchased
on 1 July 2016 for a period of one year.
 Annual depreciation of office equipment was RM3,600.
 Utilities expense amounted to RM11,700.
 Rent expense was RM6,000. It has not yet been recorded and
will only be paid in January 2017.
 Unearned revenue on 31 December 2016 was RM29,700.

Required:

 Prepare the relevant adjusting journal entries.

 Prepare the adjusted trial balance as at 31 December 2016.
 Prepare (i) Statement of profit or loss (ii) Statement of changes
in Owner's Equity

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