account adjustment , its types and time issue
- 1. We'llcome to Problem SOLUTION ACCOUNT ADJUSTMENT By : Abdul Ghaffar
- 2. ACCOUNT ADJUSTMENT The accounting cycle is like a circle. It begins with transaction analysis and ends with closing the books. Each and every steps in between is vital to the process. There are eight general steps to the accounting cycle. Today, we’re going to talk about the sixth step in the cycle –adjustment to account.
- 3. Account adjustment, also known as adjustment entries, are entries that are made in the general journal at the end of an accounting period to bring account balance up to date. Unlike entries made to the general journal that are a result of internal events. Internal events are those events that have occurred in the business that don’t involve an exchange of goods or service with another entity.
- 4. TYPES OF ACCOUNT ADJUSTMENTS Accrued Revenue Accrued Expenses Deferred Revenues Deferred Expenses
- 5. ACCRUED REVENUE Accrued revenue consists of income that has been earned from customers but no payments has been received. In other word, a good or service has been provided to a customer, but the customer hasn’t paid for it by the end of the accounting period. Accrued revenue are recorded as receivable at the end of the year tp reflect the amount of money the customer owe the business for the goods or services they purchased.
- 6. ACCRUED EXPENSES Accrued expenses are expenses a company needs to account for, but for which no invoices have been received and no payments have been made. Here are some common example of expenses that can be accrued. Interest on loan, Goods received, Service received, Wages for employees, Taxes, Commissions, Utilities, Rent.
- 7. DEFERRED REVENUES Deferred revenues, also known as unearned revenue, refers to advance payments a company receives for products or services that are to be delivered or performed in the future. The company that receives the prepayments records the amount as deferred revenue, a liability, on its balance sheet.
- 8. Deferred revenues Deferred revenue is a liability because it reflects revenue that has not been earned and represents products or service that are owed to a customer. As the product or service is delivered over time, it is recognized proportionally as revenue on the income statement.
- 9. DEFERRED EXPENSES Deferred expenses, also called a prepaid expense, is a cost that as been incurred but is recorded as an assets until the related goods or service are consumed. In other words, Money has been spent on goods or services in the current period, but the goods and service have not been consumed in the periods.
- 10. TIMMING ISSUES A fiscal year is a one-year period that companies and governments use for financial reporting and budgeting. A fiscal year is most commonly used for accounting purposes to prepare financial statements. Although a fiscal year can start on January 1st and end on December 31st not fall fiscal year correspond with the calander year. For examples, universites often begin and end their fiscal years according to the school year.
- 11. Timing issues A fiscal year is important to publicly-traded corporations and their investors since it includes revenue and earning making year-to-year comparisons possible. For tax purposes, the internal revenue service allow companies to be either calander year taxpayers or fiscal-year taxpayers.
- 12. Calendar year A calendar year is a one-year period that begins on January 1st and ends on December 31, based on the commonly-used Gregorian calendar. For individual and corporate taxation purposes the calendar year commonly coincides all of the years financial information used to calculate income tax payable. A calendar year for individual and many companies are used as the fiscal year, or the one-year period on which their payable taxes
- 13. continue are calculated. Some companies choose to report their taxes based on a fiscal year. In most cases, this period starts on April 1st and ends on March 31st, and better conforms to seasonality patterns or other accounting concerns applicable to their businesses.
- 14. The difference between accrual and basic accounting The difference between accrual and basic accounting lies in the timing of when sales and purchases are recorded in your accounts. Cash accounting recognizes revenues and expenses only when money changes hands, but accrual accounting recognizes revenues when it’s earned, and expenses when they billed (but not paid). We’ll look at both methods in detail, and how each one would affect your business.
- 15. Recognizing revenues According to the principal of revenue recognition, revenues are recognized in the period when it is earned buyer and seller have entered Into transfer assets and realized or realizable cash payment has been received or collection of payment is reasonably assured.
- 16. Expense recognition The assets produced and sold or services rendered to generate revenue also generate related expenses. Accounting standards require that companies using the accrual basis of accounting and match all expenses with their related revenues for the period, so that the income statement shows the revenues earned and expenses incurred in the correct accounting period.
- 17. Types of adjusting entries Adjusting entries are classifies as either deferrals or accruals. DEFERRALS: Prepaid expenses, Unearned revenues ACCRUALS: Accrued revenues, Accrued expense
- 18. deferral Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed. Unearned revenues: Cash received and recorded as liabilities before revenue is eaned.
- 19. accrual Accrued revenues: Revenues earned but not yet received in cash or recorded. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.
- 20. Prepaid expenses
- 21. Prepaid expenses Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired. Generally, the amount of prepaid expenses that will be used up within one year are reported on a company’s balance sheet as a current assets. As the amount expired, the current assets is reduced and the amount of the reduction is reported as an expenses on the income statement.
- 22. Unearned revenue
- 23. Unearned revenue Unearned revenue is money received from a customer for work that has not yet been performed. This is advantage from a cash flow perspective for the seller, who now has the cash to perform the required service. Unearned revenue is a liability for the recipient of the payment, so the initial entry is a debit to the cash account and the a credit to the unearned revenue account.
- 24. Accrued revenues
- 25. Accrued revenue Accrued revenue is a sale that has been recognized by the seller, but which has not yet been billed to the customers. This concepts is used in businesses where revenue recognition would otherwise be unreasonably delayed. Accrued revenue is quite common in the series industries, since billing may be delayed for several months, until the end of the projects or on designated milestone billing dates. Accrued revenue is much less common in manufacturing businesses, since invoice are usually issued as soon as products are shipped.
- 26. Accrued expenses
- 27. Accrued expenses Accrued expenses is expense which has been incurred but not yet paid. Expense must be recorded in the accounting period in which it is incurred. Therefore, accrued expense must be recognized in the accounting period in which it occurs rather than in the following period in which it will be paid. As expense will be debited to recorded the accrued expense, a corresponding payable must be created to account for the credit side of the transaction.
- 28. Adjusting entries for deferrals Deferrals are either prepaid expense or unearned revenue. Companies make adjustment for deferrals to record the portion of the deferrals that represented the expense incurred or the revenue earned in the current period.
- 29. Adjusting entries for accruals The second category of adjusting entries is accruals companies make adjusting entries for accrual to record revenue earned and expense incurred in the current accounting period that have not been recognized through daily entries.
- 30. Financial statement from adjusted trial balance. List of all balance of ledger account after the preparation of adjusting entries. Ensures arithmetic's accuracy after making the adjustment entries. Contains balances of assets liabilities equities, revenues, and expense. primary basic for the preparation of financial statement.
- 31. Adjusted trial balance trilia company ENTRIES 01 Salaries and wages expenses 16200 02 Supplies expenses 1300 03 Rent expenses 13000 04 Insurance expenses 1500 05 Depreciation 500 06 Acculated depreciation-equipment 4000 07 a/payable 6000 08 Salaries and wages payable 1200
- 32. 09 Unearned rent revenue 1100 10 Owner capital 16000 11 Service revenue 34000 12 Rent revenue 12900 13 cash 11000 14 a/receivable 12500 15 supplies 1200 16 Prepaid insurance 3000 17 equipment 15000
- 33. Trilia company adjusted trial balances s.n o Name of account l.f debit credit 01 cash ** 11000 02 A/recivable ** 12500 03 supplies ** 1200 04 Prepaired insurance ** 3000 05 equipment ** 15000 06 Acculated depreciation- equipment ** 4000 07 Account payable ** 6000 08 Salaries and wages payable ** 1200 09 Unearned rent revenue ** 1100
- 34. Trilia company adjusted trial balance s.n o Name of account l.f debit credit 10 Owner capital ** 16000 11 Service revenue ** 34000 12 Rent revenues ** 12900 13 Supplies expenses ** 1300 14 Rent expenses ** 13000 15 Insurance expenses ** 1500 16 drepreciation ** 500 17 Salaries and wages explain ** 16200 ------------- ------------- ------------- -------------
- 35. Trilia company balance sheet s.no Assets 01 Cash 11000 02 Account receivable 12500 03 Supplies 1200 04 Prepaired insurance 3000 05 Equipment 15000 06 Less accum drepreciation equipment (4000) ------------- ---------- total assets 38700
- 36. Continue…… Liabilities and owner equity 07 Account payable 6000 08 Salaries and wages payable 1200 09 Unearned rent revenue 1100 ------- ------ total liabilities 8300 10 Owner equity 3040 0 ------- ------ Total liabilities and owner equity 3870 0
- 37. Thank You