Accounting
Teach Yourself Series
Topic 10: Balance Day Adjustments
A: Level 14, 474 Flinders Street Melbourne VIC 3000
T: 1300 134 518 W: tssm.com.au E: info@tssm.com.au
© TSSM 2013
Page 1 of 33
Contents
Balance Day Adjustments .................................................................................................................................. 3
Initial terminology .......................................................................................................................................... 3
As it appears in Units 2 - 4 ......................................................................................................................... 3
Review Questions .................................................................................................................................. 4
Depreciation ................................................................................................................................................... 5
As it appears in Units 2 - 4 ......................................................................................................................... 5
As it appears in Unit 4 ................................................................................................................................ 7
Review Questions .................................................................................................................................. 9
Bad Debts ..................................................................................................................................................... 11
As it appears in Units 3 - 4 ....................................................................................................................... 11
Review Questions ................................................................................................................................ 12
Stock Loss .................................................................................................................................................... 13
As it appears in Units 2 - 4 ....................................................................................................................... 13
Review Questions ................................................................................................................................ 14
Prepaid Expenses .......................................................................................................................................... 15
As it appears in Units 2 & 3 ..................................................................................................................... 15
Review Questions ................................................................................................................................ 16
Accrued Expenses ........................................................................................................................................ 17
As it appears in Units 2 & 3 ..................................................................................................................... 17
Review Questions ................................................................................................................................ 18
Stock Write Down ........................................................................................................................................ 19
As it appears in Unit 4 .............................................................................................................................. 19
Review Questions ................................................................................................................................ 21
Stock Gain .................................................................................................................................................... 22
As it appears in Units 2 - 4 ....................................................................................................................... 22
Review Questions ................................................................................................................................ 23
Prepaid Sales Revenue ................................................................................................................................. 24
As it appears in Unit 4 .............................................................................................................................. 24
Review Questions ................................................................................................................................ 25
Other Prepaid Revenue ................................................................................................................................. 26
As it appears in Unit 4 .............................................................................................................................. 26
Review Questions ................................................................................................................................ 27
Accrued Revenue ..................................................................................................................................... 28
As it appears in Unit 4 .............................................................................................................................. 28
Review Questions ................................................................................................................................ 29
Solutions to Review Questions ........................................................................................................ 30
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Balance Day Adjustments
Accounting financial reports are required to determine the performance of a business over a reporting period.
The Qualitative Characteristics of Relevance, Reliability and Comparability require that the financial reports
are accurate, based on reliable, unbiased information and apply the same accounting methods as previous
periods so comparisons can be made.
In order to prepare financial reports that are accurate and provide more useful information for decisionmaking, some accounts require adjustments so the information presented is accurate and reflective of
performance for that reporting period.
Initial terminology
As it appears in Units 2 - 4
At the end of the reporting period, prior to the preparation of reports, it is important that the records are
accurate and that the financial reports are accurate. This is particularly the case for the profit figure reported
and the financial position of the business as reflected in the Balance Sheet.
Consequently, to make the information in the reports more relevant for decision-making, some adjustments
to existing accounts must occur.
The preparation of adjustments support the Accounting principles of reporting Period and Going Concern –
the life of the business is assumed to be continuous and so is broken up into equal periods of time to allow
the preparation of reports (Going Concern). These reports must match the revenue earned in a period with
the expenses incurred in a period to determine the profit for that period (Reporting Period).
Balance day adjustments can be grouped into two broad categories:


Expense adjustments
Revenue adjustments
Expense adjustments involve transactions for:






Depreciation
Bad Debts
Stock Loss
Prepaid Expenses
Accrued Expenses
Stock Write Down
Revenue adjustments involve transactions for:




Stock Gain
Prepaid Sales Revenue
Other Prepaid Revenue
Accrued Revenue
© TSSM 2013
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Review Questions
1. Explain with reference to a Qualitative Characteristic why balance day adjustments are required.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
© TSSM 2013
Page 4 of 33
Depreciation
As it appears in Units 2 - 4
Depreciation is the allocation of the cost of an asset over its useful life. The calculation and recording and
reporting of depreciation requires understanding of a number of key terms:

Historical cost – the original purchase price of an asset plus any one-off costs associated with getting
the asset into a position and condition for use by the business.

Useful life – the length of time the business will keep an asset and that asset will provide an inflow of
economic benefit to the business. This time period may not be the same as how the asset will last.
Some businesses may have a policy of replacing Motor Vehicles every five years while we know a
Motor Vehicle will last for longer than that.

Residual value – the amount the business expects to receive for the asset when it is sold or traded-in
at the end of its useful life.

Depreciable value – the total amount to be depreciated over the useful life of the asset. Found by
deducting Residual Value from Historical Cost.

Depreciation expense – the part of the value of the asset that is consumed each reporting period.

Accumulated depreciation – the total amount of depreciation charged against an asset at that point in
time.

Carrying value – the unallocated cost of an asset plus the residual value at a point in time. Found by
deducting accumulated depreciation from historical cost.
Depreciation is charged at a fixed percentage (called the straight-line method) on the Historical Cost of an
asset.
© TSSM 2013
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Example:
The business purchased a photocopier on 31 March 2013. It had an Invoice price of $10,000 plus $1,000
GST. The business paid $1,000 (plus $100 GST) to have the photocopier installed.
Insurance on the Asset is $20 per month (plus $2 GST per month). The Asset has a life of 8 years but the
business has a policy of replacing Assets every 5 years. It is expected that the business will sell the Asset for
$2,000 at the end of its useful Life.
Key points:
 Historical Cost - $10 000 + $ 1 000 = $11 000
◦ Annual insurance is an ongoing expense
◦ GST is not included in the historical cost
 Estimated Life – 5 or 8 years?
◦ Business plans to only keep it for 5
 Scrap Value - $2 000
 Thus 11 000 – 2 000 /5 = $ 1 800 per annum
 Depreciation on Photocopier per month = $1 800 / 12 = $150
Assume balance day is 30 June 2013:
Date
Particulars
2013
Jun 30
General
Debit
Depreciation - Photocopier
Ledger
Credit
Subsidiary Ledger
Debit
Credit
450
Accumulated
Depreciation Photocopier
450
Balance Sheet Extract 2013
Non Current Assets
Photocopier
10 000 (1)
Less Accumulated Depreciation
500 (2) 9 500 (3)
1. The Historical Cost of the NCA – the original purchase price plus all once off costs associated with
getting the asset ready for use
2. Accumulated Depreciation – the total amount of depreciation that has been allocated as an expense
against revenue to date
3. Carrying Value – that part of the asset that has yet to be depreciated that is yet to be matched against
revenue as an expense + the residual value
© TSSM 2013
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As it appears in Unit 4
In Unit 4 students are still required to calculate and record and report Depreciation. However, a second
method of calculating depreciation is introduced and students must understand why this method may be
used, which assets are generally depreciated using this method and the effect on profit of using one method
compared to the other. This second method is called the Reducing Balance method.
The Reducing Balance method of depreciation allocates more of the cost of an asset in the early years of the
asset’s life compared to the later years as it assumes that the asset is more productive in the early years. An
example might be a Motor Vehicle which becomes a ‘used’ or ‘second-hand’ car once it has been driven. It
is also more reliable and more efficient when it is newer. As the asset becomes older it doesn’t work as well
and therefore does not earn as much revenue. Depreciation is charged to match this pattern of use.
Journal and ledger entries for this method of depreciation are no different to the recording or reporting using
the straight-line method. The difference is the basis for calculation.
In straight-line depreciation we charge a fixed % of the cost of the asset. In reducing balance we charge a
fixed % of the reduced balance. The reduced balance is Historical Cost – Accumulated Depreciation. An
example is:
The business purchases a Motor Vehicle for $36,000. It is expected to have a useful life of 8 years and a
residual value of $6,000. Depreciation is to be charged at 20% per annum on the reducing balance method.
The table below shows the calculation of depreciation for the life of the asset:
Year
1
2
3
4
5
6
7
8
Reduced Balance
36000
28800
23040
18432
14746
11796
9437
7550
Depreciation
Expense
7200
5760
4608
3686
2949
2359
1887
1510
Accumulated
Depreciation
7200
12960
17568
21254
24204
26563
28450
29960
In Year 1 depreciation is charged at 20% on $36,000 – as no depreciation has been charged as yet, this is
seen as the ‘reduced balance’. The depreciation expense calculated as 36,000 x 20% = $7,200. This is
deducted from the Historical Cost to determine the ‘reduced balance’ of $28,800.
In Year 2, depreciation is calculated as $28,800 x 20%. This shows depreciation as $5,760 and a Carrying
Value of $23,040.
This calculation continues until the end of Year 8 where depreciation expense is $1,510 and the Carrying
Value at the end of Year 8 is $6,040 and Accumulated Depreciation is $29,960.
The difference between this method and the Straight-line method is that depreciation charged is different
each period. The result over the life of the asset should be similar. The following example using the
information above demonstrates this (Straight-line method charges depreciation at $3,750 per annum):
© TSSM 2013
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Reducing Balance
Year
1
2
3
4
5
6
7
8
Reduced
Balance
36000
28800
23040
18432
14746
11796
9437
7550
Depreciation
Expense
7200
5760
4608
3686
2949
2359
1887
1510
Straight Line
Accumulated
Depreciation
7200
12960
17568
21254
24204
26563
28450
29960
Historical
Cost
36000
36000
36000
36000
36000
36000
36000
36000
Depreciation
Expense
3750
3750
3750
3750
3750
3750
3750
3750
Accumulated
Depreciation
3750
7500
11250
15000
18750
22500
26250
30000
In both cases, the Carrying Value at the end of the Useful Life is approximately $6,000 (Reducing Balance is
slightly less accurate).
Over the life of the asset the depreciation charged is similar – it is just that the reducing balance method
charges a different amount each period in an effort to better match allocation of cost to revenue earned.
The effect on profit of using the different methods is:
 Reducing balance charges more depreciation than straight-line in the early years so profit will be
lower
 Reducing balance charges less depreciation than straight-line in the later years so profit will be
higher
 Over the life of the asset the amount of depreciation charged is similar – so the overall effect on
profit is negligible.
© TSSM 2013
Page 8 of 33
Review Questions
2. On 1 February 2013 the business purchased a new Delivery Vehicle. Details of the purchase were:
Cost
$42 000
Delivery charge
$1 000
Modifications (shelving & signage) $2 000
Annual Registration
$1 200
GST
$4 620
The Delivery Vehicle has an expected life of 10 years but the business plans to keep it for 6 years at
which time they will sell the asset for an expected $9 000.
Calculate the Depreciation Expense to be charged on 31 December 2013.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
3. Provide definitions for the following terms:
i. Residual value
______________________________________________________________________________
______________________________________________________________________________
ii. Accumulated depreciation
______________________________________________________________________________
______________________________________________________________________________
4. On 31 December 2013 the business charged depreciation on Equipment of $2,500. Show the General
Journal entry necessary to record this.
Date
2013
© TSSM 2013
Particulars
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
Page 9 of 33
5. The following information relates to a Truck purchased by the business:
 Historical Cost - $54,000
 Useful Life – 8 years
 Residual Value - $14,000
 Depreciation charged at: $5,000 p.a using the Straight-line method or 17% using the Reducing
Balance method
Complete the table below calculating depreciation on the Truck using both methods
Reducing Balance
Year
1
2
3
4
5
6
7
8
Reduced
Balance
Depreciation
Expense
Straight Line
Accumulated
Depreciation
Historical
Cost
Depreciation
Expense
Accumulated
Depreciation
6. Using the information in the table above, state the effect on profit (and the $ amount of the effect) in
Year 3 of using the Reducing Balance method of depreciation rather than the Straight-line method.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
© TSSM 2013
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Bad Debts
As it appears in Units 3 - 4
A Bad Debt occurs when a Debtor is unable to pay their debt.
There are two scenarios:
1. Debtor can’t pay any of the amount owed
2. Debtor pays a % of what is owing and the balance is written off
Bad Debts is an expense as it is a reduction in inflows in the form of a decrease in Assets that decreases
Owner’s Equity and is not Drawings.
A Bad Debt can occur at any time during the reporting period and is recorded when known.
Example 1
On 5 May 2013 H. Simpson is informed by a solicitor for B. Gumble that Gumble has been declared
bankrupt and is unable to pay the $300 owed to Simpson. This information is recorded in the General
Journal [Memo 5].
Date
2013
Particulars
General
Debit
May-05
Bad Debts
300
Debtors Control
Ledger
Credit
Subsidiary Ledger
Debit
Credit
300
Debtor - Gumble
300
Debt written off as irrecoverable [Memo 5]
Example2
On 5 May 2013 H. Simpson received a letter from a solicitor for B. Gumble that Gumble has been declared
bankrupt and is only able to pay $0.20 in the dollar of the $300 owed to Simpson. A cheque accompanied the
letter [Rec. 43] and this information must be recorded in the appropriate journals [Memo 5].
Date
2013
Particulars
General
Debit
May-05
Bad Debts
240
Debtors Control
Ledger
Credit
Subsidiary Ledger
Debit
Credit
240
Debtor - Gumble
Date
2013
Details
May-05 Debtor - Gumble
© TSSM 2013
Rec Bank Disc Debtors Cost
No.
Exp. Control of Sales
43
60
240
Selling
Price
Sundries
GST
60
Page 11 of 33
Review Questions
7. On 4 March 2013 a Debtor - H. Green was declared bankrupt. His $700 debts were to be written off.
Prepare the General Journal entry necessary to record this information.
Date
2013
Particulars
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
8. Explain why Bad Debts is considered an expense.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
© TSSM 2013
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Stock Loss
As it appears in Units 2 - 4
At the end of a reporting period, the information that is shown in the Stock Cards is checked for accuracy of
recording. This is done using a physical stocktake whereby the actual amount of stock on hand is physically
counted. The result is then compared with the figure shown in the Stock Card.
In some circumstances the physical count reveals an amount less than what is shown in the Stock Card. This
is known as a Stock Loss. It can occur due to:





Theft of stock
An undersupply of stock from the supplier
An oversupply of stock to a customer
A recording error
An error on the original Invoice
A Stock Loss is an Expense and will be reported as such in the Income Statement.
Example
At the end of the reporting period a Stock Card revealed the following:
Date
Details
Qty
IN
Unit
Cost
Total
Cost
29/06/2013 Rec 45
Qty
3
OUT
Unit
Cost
50
BALANCE
Total
Cost
150
Qty
20
Unit Cost
50
Total
Cost
1 000
A physical stocktake revealed that there were 19 units on hand.
Hence there is a Stock Loss of 1 unit. This is recorded in the General Journal, the Stock Card, the ledger
accounts and reported in the Income Statement.
Date
2013
Particulars
Jun 30
Stock Loss
General
Debit
Details
Qty
29/06/2013 Rec 45
30/6/2013
Memo 3
© TSSM 2013
Subsidiary Ledger
Debit
Credit
50
Stock Control
Date
Ledger
Credit
IN
Unit
Cost
Total
Cost
50
Qty
3
1
OUT
Unit
Cost
50
50
BALANCE
Total
Cost
150
50
Qty
20
19
Unit Cost
50
50
Total
Cost
1 000
950
Page 13 of 33
Extract from INCOME STATEMENT FOR YEAR ENDING 30 June 2013
Revenue
$
$
Sales
6 900
Less Cost of Sales
3 500
Gross Profit
3 400
Less Stock Loss
50
Adjusted Gross Profit
3 350
Review Questions
9. Explain what is meant by an undersupply by supplier.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
10. Prepare the General Journal entry necessary to record a Stock Loss of $500
Date
2013
© TSSM 2013
Particulars
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
Page 14 of 33
Prepaid Expenses
As it appears in Units 2 & 3
A Prepaid Expense is an expense paid in advance. The adjustment required is to determine the amount of the
Prepaid Expense used during the current reporting period and the amount yet to be used – which will be used
in the next reporting period.
In recording the information for this type of transaction there will be two tasks:


Recording the payment of the prepaid expense
The adjusting entry required on balance day
Example
On 1 March 2013 the business paid $1,200 (+ $120 GST) for the business Insurance policy for the coming
year.
The entry in the Cash Payments Journal would be:
Cash Payments Journal
Date
2013
Details
Prepaid Insurance
Mar 1 Expense
Chq.
No.
Bank
Disc. Creditors Stock
Rev
Control Control
*
1 320
*
Sundries
GST
1 200
120
At 30 June 2013 an adjustment is required to determine the amount of Insurance used or ‘expensed’. 4
months have been used at $100 per month. Therefore $400 is the Insurance Expense for the period. The
following General Journal entry is required:
Date
2013
Particulars
Jun 30
Insurance Expense
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
400
Prepaid Insurance
Expense
400
The Prepaid Insurance Expense account would appear as:
Date
2013
Jun 30
Cross-reference
Bank
Prepaid Insurance Expense
Amount
Date
Cross-reference
2013
1 200
Jun 30
Insurance Expense
Amount
400
The balance of the Prepaid Insurance Expense account will be reported as a Current Asset in the Balance
Sheet and the Insurance Expense will be reported as an Expense in the Income Statement.
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Review Questions
11.
Explain why Prepaid Rent Expense is classified as a Current Asset in the Balance Sheet.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
12. The following information is available for Prepaid Advertising Expense:
Balance of account at 1 July 2013 - $4,800
Paid 12 months Advertising in advance on 1 November 2013 - $18,000 + $1,800 GST
Calculate the Advertising Expense for the 12 months ended 30 June 2013
13. Using the information above, prepare the General Journal entry necessary on 30 June 2013.
Date
2013
© TSSM 2013
Particulars
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
Page 16 of 33
Accrued Expenses
As it appears in Units 2 & 3
Accrued Expenses are the ‘opposite’ of Prepaid Expenses – in this case the expense has been incurred but
not yet paid.
This requires two tasks to be completed.


Recording the expense incurred
Recording the payment of the expense in a future reporting period.
This type of adjustment usually relates to Wages expense where employees are paid periodically (fortnightly
or monthly) after they have completed the work.
At times, the end of the reporting period and the day upon Wages are paid do not coincide. In this situation
the business must determine how much Wages are owing for this reporting period as the work has been done
this period and hence the expense incurred.
Example
At 31 December 2013, the business owes $800 in wages to employees for work completed during the month.
The next payment of wages is due on 10 January 2013.
The two-fold effect of this transaction is:
 Wages will increase as the amount of the expense incurred has increased
 A Liability has been created because the business has incurred an obligation (have a debt they must pay in
the next reporting period.
The recording of this adjustment occurs in the General Journal.
Date
2013
Particulars
Dec 31
Wages
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
800
Accrued Wages
800
On 10 January 2013 the business will make its next payment for Wages. This payment will include the
payment of the Liability – Accrued Wages.
Using the example above, the business made its next Wages payment on 10 January 2013 of $4,800
[Chq 23].
Cash Payments Journal
Date
2013
Details
Jan 10 Wages
Accrued Wages
Chq.
No.
23
Bank
4 800
Disc. Creditors Stock
Rev
Control Control
*
Wages Sundries
4 000
800
The payment is separated to reflect that two different accounts are being debited.
© TSSM 2013
Page 17 of 33
GST
Review Questions
14. Explain why Accrued Wages is reported as a Current Liability
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
15. On 31 December 2013 Wages were owing to employees. There are 3 employees who are paid $100 a day
each and there are 4 days Wages owing. Prepare the General Journal entry required.
Date
2013
© TSSM 2013
Particulars
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
Page 18 of 33
Stock Write Down
As it appears in Unit 4
The Historical Cost principle states that ‘all transactions are recorded at their original value. Therefore,
items are shown in the accounting records at their historical (original) price’. Hence stock is recorded at its
cost price in the journals and ledgers rather than at its selling price. It is then presumed that we will sell our
stock at a higher price – many businesses will place a ‘mark up’ on their stock to determine its selling price.
A mark up is usually a fixed percentage of the cost price that is added to the cost price to determine the
selling price.
However, there are situations where stock is unable to be sold at its normal selling price. Indeed, there are
times when it cannot be sold above its cost price. This may be due to a number of factors:



Stock is slightly damaged but still saleable
Stock has been superseded by a newer model
Stock is nearing its use by date (fresh food)/end of season (clothing)
In these circumstances a business will try to sell the stock rather than record it as a loss. When this situation
occurs, the business will adopt the concept of ‘Lower of cost and Net Realisable Value’.
Cost – original price paid for the stock
Realisable value – the estimated price at which stock could be sold for
Net realisable value (NRV) - the estimated price the stock could be sold for less any estimated costs
involved in selling the stock.
Once cost and NRV have been determined, the cost which is lower is identified.
© TSSM 2013
Page 19 of 33
Example
The business had the following stock item on hand at 4 December 2013:
Excel DVD Player – 20 units @ $80 each
The manufacturer has just notified the business that a new model of DVD player – the Excel DVD+ - will be
available in mid-July. The owner wishes to sell all current DVD players before the new model is available.
He decides to sell the DVD players at $70. To facilitate the sale the owner will advertise the special offer at a
cost of $5 per unit.
From this information we can see:
Cost = $80
Realisable Value = $70
Estimated selling costs = $5
Net Realisable Value = $65
Using this example - our stock is now only realistically worth $65 per unit, so our records must reflect that.
This is due to the accounting principle of conservatism which states, in part, ‘it is acknowledged that .....
losses will be recognised as soon as they are likely to occur’.
Recognising the loss requires entries to be made in the General Journal, stock card and general ledger and
the expense to be reported in the Income Statement.
General Journal
Date
Particulars
2013
Dec 4
General Ledger
Debit
Credit
Stock Write Down
Subsidiary Ledger
Debit
Credit
300
Stock Control
300
Stock Card item: Excel DVD Players
Date
Details
2013
Jun 29 Balance
Jun 30 Memo 43
Qty
IN
Unit
Cost
Total
Cost
Qty
OUT
Unit
Cost
20
15
BALANCE
Total
Cost
300
Qty
20
20
Unit Cost
80
65
Total
Cost
1 600
1 300
Extract from INCOME STATEMENT FOR YEAR ENDING 31 December 2013
Revenue
$
$
Sales
7 000
Less Sales returns
(100)
6 900
Less Cost of Sales
3 500
Gross Profit
3 400
Less Stock Write Down
300
Adjusted Gross Profit
3 100
© TSSM 2013
Page 20 of 33
Review Questions
16. The stock at end includes 4 units that have proved to be unpopular with customers. These units were
originally purchased for $90 each, and have had a selling price of $130. The business feels that they can
only sell them for $100, with a bonus given to sales staff of $20 for each pair of pants sold (memo 64).
Calculate the total NRV for the stock.
17. Prepare the General Journal entry necessary for the information above.
Date
2013
© TSSM 2013
Particulars
General Ledger
Debit
Credit
Subsidiary Ledger
Debit
Credit
Page 21 of 33
Stock Gain
As it appears in Units 2 - 4
At the end of a reporting period, the information that is shown in the Stock Cards is checked for accuracy of
recording. This is done using a physical stocktake whereby the actual amount of stock on hand is physically
counted. The result is then compared with the figure shown in the Stock Card.
In some circumstances the physical count reveals an amount greater than what is shown in the Stock Card.
This is known as a Stock Gain. It can occur due to:




An oversupply of stock from the supplier
An undersupply of stock to a customer
A recording error
An error on the original Invoice
A Stock Gain is Revenue and will be reported as such in the Income Statement.
Example
At the end of the reporting period a Stock Card revealed the following:
Date
Details
Qty
IN
Unit
Cost
Total
Cost
29/06/2013 Rec 45
Qty
3
OUT
Unit
Cost
50
BALANCE
Total
Cost
150
Qty
20
Unit Cost
50
Total
Cost
1 000
A physical stocktake revealed that there were 21 units on hand.
Hence there is a Stock Gain of 1 unit. This is recorded in the General Journal, the Stock Card, the ledger
accounts and reported in the Income Statement.
Date
2013
Particulars
Jun 30
Stock Control
General
Debit
Details
29/06/2013 Rec 45
30/6/2013
Memo 3
© TSSM 2013
Subsidiary Ledger
Debit
Credit
50
Stock Gain
Date
Ledger
Credit
Qty
IN
Unit
Cost
1
50
50
Total
Cost
50
Qty
3
OUT
Unit
Cost
50
BALANCE
Total
Cost
150
Qty
20
21
Unit Cost
50
50
Total
Cost
1 000
1 050
Page 22 of 33
Extract from INCOME STATEMENT FOR YEAR ENDING 30 June 2013
Revenue
$
$
Sales
6 900
Less Cost of Sales
3 500
Gross Profit
3 400
Plus Stock Gain
50
Adjusted Gross Profit
3 450
Review Questions
18. At 30 June 2013 the following information was available:
Stock as per Stock Control account: $46,700
Stock as per physical stocktake: $47,100
Prepare the General Journal entry necessary.
Date
2013
© TSSM 2013
Particulars
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
Page 23 of 33
Prepaid Sales Revenue
As it appears in Unit 4
Prepaid Sales Revenue is revenue received in advance or revenue received but not yet earned. The business
must determine what part of the revenue received has been earned and therefore must be reported in the
current reporting period. Prepaid Sales Revenue occurs when a customer orders stock to be delivered at
some time in the future (possibly in the next reporting period) and pays a deposit at the time of ordering.
Some or all of the stock may be delivered before the end of the reporting period.
There are two parts to this type of question students may be faced with:


Recording the receipt of sales revenue in advance (not including GST)
Delivery of some or all of the stock
Example
On 12 November 2013 a customer (Highview College) placed an order for sporting goods that had a total
selling price of $11 000 which included GST of $1 000. The total cost price of the stock was $5 000. The
customer paid a $5 000 deposit. On 29 December 2013 the sporting goods were delivered to the customer.
Firstly, we record the receipt of the deposit.
Cash Receipts Journal
Date
2013
Details
Nov 12
Prepaid Sales
Revenue
Rec.
No.
Disc.
Exp
Bank
Debtors
Control
Cost
of
Sales
Sales
*
5 000
Sundries
GST
5 000
At 29 December 2013 when the stock is delivered an adjustment is required to recognise that the revenue has
now been earned.
General Journal
Date
Particulars
2013
Prepaid Sales
Dec 29
Revenue
General Ledger
Debit
Credit
Subsidiary Ledger
Debit
Credit
5 000
Sales Revenue
5 000
The remainder of the revenue now earned is recorded as ‘normal’ in the Sales Journal.
Sales Journal
Date
2013
Debtor
Dec 29
Highview College
Inv.
No.
Cost of
Sales
5 000
Sales
5 000
GST
1 000
Debtors
Control
6 000
If you ‘put’ all 3 entries together you will see that Sales Revenue is $10,000, GST incurred is $1,000, Cost
of Sales is $5,000 and the amount Debtors still owe is $6,000
This type of adjustment can be made more complicated by having not all stock delivered at the one time.
© TSSM 2013
Page 24 of 33
The key is to know what the ‘final’ answer should be and work ‘backwards’ to get this.
Review Questions
19. At 21 December 2013 the business received a $2,000 deposit from a customer (Highview College). The
deposit was for an order of 10 Elite keyboards. The keyboards have a cost price of $700 each and a
selling price of $1,500 plus $150 GST each.
The keyboards are scheduled to be delivered on 7 January 2013. On 7 January 2013 the stock was
delivered.
Prepare all journal entries necessary
Cash Receipts Journal
Date
2013
Details
Rec.
No.
Bank
Disc.
Exp
General Journal
Date
Particulars
2013
Sales Journal
Date
2013
Debtor
© TSSM 2013
Debtors
Control
Cost of
Sales
Sales
General Ledger
Debit
Credit
Inv.
No.
Cost of
Sales
Sales
GST
*
Sundries
GST
Subsidiary Ledger
Debit
Credit
Debtors
Control
Page 25 of 33
Other Prepaid Revenue
As it appears in Unit 4
A second option mentioned above is where the business earns income from a secondary source – often Rent
Revenue.
Example
The business owns the adjoining shop and rents it out to a business providing repairs to electrical appliances.
The rental arrangement provides for the business to pay $2,000 (+ $200 GST) per month, 6 months in
advance. The last payment was made on 1 November 2013 (Rec. 113).
The task is to determine the amount of revenue earned for the period ending 31 December 2013.
Firstly, we record the receipt of the revenue.
Cash Receipts Journal
Date
Details
Rec.
No.
Nov 1
Prepaid Rent
Revenue
113
Bank
13 200
Disc.
Exp
Debtors
Control
Cost of
Sales
Sales
*
Sundries
GST
12 000
1 200
At 31 December 2013 an adjustment is required to recognise the amount of revenue earned.
General Journal
Date
Particulars
General Ledger
Debit
Credit
Prepaid Rent
Dec 31 Revenue
4 000
Rent Revenue
Date
2013
Dec 31
© TSSM 2013
Cross-reference
Rent Revenue
Balance
Subsidiary Ledger
Debit
Credit
4 000
Prepaid Rent Revenue
Amount Date
Cross-reference
2013
4 000
Nov1
Bank
8 000
12 000
Amount
12 000
12 000
Page 26 of 33
Extract from INCOME STATEMENT FOR PERIOD ENDING 31 Dec 2013
Revenue
$
Sales
$
5 640
Less Cost of Goods Sold
Cost of Sales
2 570
Plus Freight In
220
Gross Profit
2 790
2 850
Plus Other Revenue
Rent Revenue
4 000
6 850
Review Questions
20. On 1 February 2013 the business signed a contract with an electrical repair service business to rent out a
section of the shop. The agreement stated they would pay $1 000 per month in rent, 3 months in advance.
Calculate the amount of Rent Revenue to be reported at 31 December 2013.
21. Show the General Journal entry required on 31 December 2013 using the information above.
Date
2013
© TSSM 2013
Particulars
General Ledger
Debit
Credit
Subsidiary Ledger
Debit
Credit
Page 27 of 33
Accrued Revenue
As it appears in Unit 4
This is Revenue the business has earned but not yet received. As a result, there is an Asset created because
there is an expected inflow of economic benefit at some point in the future. Like a credit sale – revenue
earned but not yet received with a Debtor created that leads to an expectation of an inflow in the near future.
However, this adjustment is not for that form of revenue. Over their life a business may develop other
sources of revenue. These sources will be small and often inconsistent but must be considered if we wish the
reports to be relevant.
The most common type of revenue in this situation is Interest Revenue.
Example
On 1 November 2013, Allen’s Appliances invested $8,000 of business funds into a 12 month term deposit
(expiration date 30-October 2013) earning 6% interest, with interest payable quarterly (1 February, 1 May, 1
August, 1 November).
At 31 December 2013 (balance day), the business has earned interest revenue from this investment but is yet
to receive this revenue.
6% of $8000 = $480 per annum
$480 ÷ 12 = $40 per month
2 months Interest Revenue earned = $80 (November & December)
General Journal
Date Particulars
General Ledger
Debit
Credit
Accrued Interest
Revenue
Subsidiary Ledger
Debit
Credit
80
Interest Revenue
80
As with Prepaid Revenue discussed earlier, the amount of revenue earned in this transaction will need to be
reported in the Income Statement.
The next stage of this transaction is the receipt of the revenue on 1 February 2013. This will be recorded in
the Cash Receipts Journal, however, we must be aware that the Interest Revenue for the full quarter (3
months) will be received, not just the amount accrued.
© TSSM 2013
Page 28 of 33
The entry will appear as:
Cash Receipts Journal
Date
Details
Feb 1
Accrued Interest
Revenue
Interest Revenue
Rec.
No.
Bank
58
120
Disc.
Exp
Debtors
Control
Cost of
Sales
Sales
Interest
Revenue Sundries
GST
80
40
Review Questions
22. The owner decides to invest $15 000 in a 12 month Term Deposit Account on 1 August 2013. The
interest rate is 6% per annum paid in two instalments on 31 January 2013 and 31 July 2013.
Prepare the General Journal entry necessary on 31 December 2013 to record the Interest Revenue earned.
Date
2013
Particulars
General Ledger
Debit
Credit
Subsidiary Ledger
Debit
Credit
23. Explain how Accrued Interest Revenue would be reported in the Balance Sheet at 31 December 2013.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
24. Prepare the Cash Receipts Journal entries required at 31 January 2013 [Rec. 97].
Cash Receipts Journal
Date
2013
© TSSM 2013
Details
Rec.
No.
Bank
Disc.
Exp
Debtors
Control
Cost of
Sales
Sales
Interest
Revenue Sundries
Page 29 of 33
GST
Solutions to Review Questions
1. Relevance requires us to report information that is useful for decision-making, hence a business should
report an accurate figure for profit. To calculate this period’s profit we must match this period’s expenses
against this period’s revenue. This requires adjustments so amounts are correctly identified.
2. Historical Cost = 42,000 + 1,000 + 2000 = 45,000
Residual Value = $9,000
Depreciable Value = 45,000 – 9,000 = $36,000
Depreciation Expense = 36,000/6 = $6,000 per annum = 6,000/12 = $500 per month x 11 months =
$5,500
3. Residual value – the amount a business expects to sell an asset for at the end of its useful life.
Accumulated depreciation – the total amount of depreciation charged against an asset at a point in time
4.
Date
2013
Particulars
General Ledger
Debit
Credit
Depreciation Equipment
Subsidiary Ledger
Debit
Credit
2 500
Accumulated
Depreciation Equipment
2
500
5.
Reducing Balance
Year
1
2
3
4
5
6
7
8
Reduced
Balance
54000
44820
37201
27648
22948
19047
15809
13121
Depreciation
Expense
9180
7619
6324
4700
3901
3238
2687
2231
Straight Line
Accumulated
Depreciation
9180
16799
23124
27824
31725
34963
37650
39881
Historical
Cost
54000
54000
54000
54000
54000
54000
54000
54000
Depreciation
Expense
5000
5000
5000
5000
5000
5000
5000
5000
Accumulated
Depreciation
5000
10000
15000
20000
25000
30000
35000
40000
6. In Year 3 depreciation using Reducing Balance is $6,324 as opposed to $5,000 using the Straight-line
method. Profit is therefore lower by $1,324.
© TSSM 2013
Page 30 of 33
7.
Date
2013
Particulars
Mar 4
Bad Debts
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
700
Debtors Control
700
Dr- H. Green
700
8.
Bad Debts represent a reduction in inflow of economic benefits in the form of a decrease in Assets
(Debtors Control) that leads to a decrease in Owner’s Equity that isn’t Drawings.
9.
If a business orders a certain amount of stock and the quantity delivered by the supplier is less, then they
have been undersupplied.
10.
Date
2013
Particulars
Jun 30
Stock Loss
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
500
Stock Control
500
11. Prepaid Rent is a current asset as it represents a future economic benefit that the business owns as a
result of a past transaction. This benefit will be received in next 12 months.
12. The expense will be:
$4,800 paid in advance + 8 months of the 12 months paid on 1 November
$18,000 / 12 = $1,500 per month x 8 months = $12,000
Expense = $16,800
13. General Journal
Date
2013
Jun 30
Particulars
Advertising Expense
Prepaid Advertising Expense
General Ledger
Debit
Credit
$
$
Subsidiary Ledger
Debit
Credit
$
$
16 800
16 800
14. Accrued Wages represent a future obligation of an outflow of economic resources which will be met in
the next 12 months.
13.
Date
2013
Particulars
Dec 31
Wages
General
Debit
Subsidiary Ledger
Debit
Credit
1 200
Accrued Wages
© TSSM 2013
Ledger
Credit
1 200
Page 31 of 33
14.
Calculation
$100 - $20
$80 x 4
Total NRV
15.
Date
2013
$ 320
Particulars
General Ledger
Debit
Credit
Stock Write Down
40
Stock Control
16.
Date
2013
Particulars
Jun 30
Stock Control
Subsidiary Ledger
Debit
Credit
40
General
Debit
Ledger
Credit
Subsidiary Ledger
Debit
Credit
400
Stock Gain
400
17.
Cash Receipts Journal
Date
2013
Details
Dec 21
Prepaid Sales
Revenue
Rec.
No.
Disc.
Exp
Bank
Debtors
Control
Sales
2 000
General Journal
Date
Particulars
2013
Prepaid Sales
Jan 7
Revenue
*
Sundries
2 000
General Ledger
Debit
Credit
Subsidiary Ledger
Debit
Credit
2 000
Sales Revenue
Sales Journal
Date
2013
Debtor
Jan 7
Highview College
Cost of
Sales
Inv.
No.
Cost of
Sales
7 000
2 000
Sales
13 000
GST
1 500
Debtors
Control
14 500
18. Rent Revenue is $1,000 per month for 11 months = $11,000
© TSSM 2013
Page 32 of 33
GST
19.
Date
2013
Dec 31
Particulars
General Ledger
Debit
Credit
Prepaid Rent
Revenue
2 000
Rent Revenue
20.
Date
2013
Dec 31
Subsidiary Ledger
Debit
Credit
Particulars
2 000
General Ledger
Debit
Credit
Accrued Interest
Revenue
Subsidiary Ledger
Debit
Credit
375
Interest Revenue
375
21. Accrued Interest Revenue represents a future inflow of economic resources as a result of a past
transaction. This inflow will occur with the next 12 months meaning the item will be classified as a
Current Asset in the Balance Sheet.
22.
Cash Receipts Journal
Date
2013
Jan 31
© TSSM 2013
Details
Accrued Interest
Revenue
Interest Revenue
Rec.
No.
Bank
97
450
Disc.
Exp
Debtors
Control
Cost of
Sales
Sales
Interest
Revenue
Sundries
375
75
Page 33 of 33
GST