1
Your mobile phone bill shows
that you have not settled
last month’s amount. This
month mobile phone bill
shows an outstanding
amount of $100 and the
current amount of $80.
Hence this outstanding
amount of $100 is also
known as accrued expense.
2
Balance Day Adjustments - Accrued Expenses
– Phua CK is pretending to be
calm but actually is very
confused. He 1
should have paid
Scenario
$12 000 for the rent for the
period from January to
December 2000.
– However, at the end of the
period, he only paid $5 000
to Tan Ah Teck Pte Ltd due to
negligence. He still owes the
company $7 000. He does
not know the correct entries
to reflect this!
Let us help him.
End of accounting period – December 2000
– Should have paid
:
$ 12 000
– Paid only
:
$ 5 000
– Owed
:
$ 7 000
This owing amount of $7 000 is also known as
Accrued Rent Expense. Mr. Phua CK still
owes Tan Ah Teck Ltd $7 000 that was not paid
for the year of 2000.
Balance Day Adjustments - Accrued Expenses
Definition:
• Are expense that have been incurred for
the accounting period BUT amount not
yet paid for by the business.
Balance Day Adjustments - Accrued Expenses
What isCredit
the
Yes….
nature
of
entry
because
accrued
it is
a liability
expense?
(still owe
Debit
or Credit
people
$)
entry?
Using Phua CK as an example.
If Mr. Phua remembered to pay the rent amount
in full, then the entries will be:JOURNAL
Date
Particulars
Year 2000
Dec 31
Rent Expense
Profit and Loss a/c
Debit
Credit
$12 000
However, this is not the case.
An additional ledger needs to be
created
– Accrued Rent Expense
$12 000
JOURNAL
Date
Particulars
Year 2000
Debit
Rent Expense
$7 000
Rent Expense (Accrued)
Dec 31
Credit
$7 000
RENT EXPENSES a/c
Year 2000
Dec 31 Bank
Bal c/d
$5 000
Year 2000
Dec 31 Profit & Loss
$12 000
$7 000
$12 000
$12 000
Year 2001
Jan 1
Bal b/d
$7 000
JOURNAL
Date
2000
Dec 31
Particulars
Profit & Loss a/c
Debit
Credit
$12 000
Rent Expense
$12 000
(Being rent expense closing off to P&L a/c)
Profit & Loss Account
2000
Dec 31 Expenses
$12 000
Balance Sheet as at Dec 2000
Liability
Accrued Rent Expense
$7 000
Balance Day Adjustments - Accrued Expenses
Summary
• Definition
• Credit/Debit nature?
• Is there a need to open another ledger for
accrued expense?
• Post this ledger to P/L or Balance Sheet?
11
Your father is very
angry! Due to
Economic crisis, the
company your
father is working for
is unable to pay him
salary for this
month. However,
his salary will be
delayed till next
month.
• Assume that your father is earning a monthly
salary of $5 000. The company will pay in total
of $10 000 to your father next month ($5 000 x
2), being one month of salary owing to your
father. This owing salary is known as ACCRUED
Salary. This applies same to firms whereby
revenues owing to them is known as Accrued
Revenues.
Definition
Are revenues earned for the current
accounting period but not yet received as
cash payment.
13
Accrued Revenue/Outstanding Revenue
•Scenario
Mr Tan sub-lets
1 a building for Phua CK for a
monthly rental of $1 000. Due to Phua’s
negligence, Mr Tan does not receive $12 000
for period from January to December 2000.
Instead Mr Tan only receives $5 000 from
Phua.
14
Accrued Revenue/Outstanding Revenue
End of accounting period – December 2000
– Should have received :
$ 12 000
– Only received
:
$ 5 000
– Outstanding revenue
:
$ 7 000
This owing amount of $7 000 is also known as
Accrued Rent Revenue. Mr. Tan still owes PCK
Ltd $7 000 that was not paid for the year of
2000.
15
Accrued Revenue/Outstanding Revenue
1 Jan 2000
31 May 2000
$ 5 000 received
31 Dec 2000
$7 000 owing
$12 000 earned
JOURNAL
Date
Year 2000
Dec 31
Particulars
Rent Revenue (Accrued)
Rent Revenue
Debit
Credit
$7 000
$7 000
16
Accrued Revenue/Outstanding Revenue
RENT REVENUE a/c
Year 2000
Year 2000
Dec 31 Profit & Loss $12 000 Dec 31 Bank
31
Year 2001
Jan 1
Bal b/d
Bal c/d
$12 000
$5 000
$7 000
$12 000
$7 000
PROFIT AND LOSS a/c
Year 2000
Dec 31 Rent
$12 000
Revenue
17
RENT REVENUE a/c
Year 2000
Year 2000
Dec 31 Profit & Loss $12 000 Dec 31 Bank
31
Year 2001
Jan 1
Bal b/d
Bal c/d
$12 000
$5 000
$7 000
$12 000
$7 000
BALANCE SHEET AS AT 31 DEC 2000
Current Asset
Accrued Revenue
$7 000
18
Balance Day Adjustments - Accrued Revenue
• Definition
• Nature of the entry - Debit or
Credit entry?
• Distinguish the differences in
adjustments between the Accrued
Expenses and Accrued Revenues
19
20
Singtel has a promotion for
new subscribers. If you
paid the 6 months of
mobile-phone monthly
subscription upfront
NOW, you get a free
Nokia 8250.
Assuming that the monthly
subscription is $20. You
like the promotion and paid
$1 200 (6x$20)
immediately in order to get
the new mobile phone.
Hence you are paying in
advance for the expense.
The payment in advance of subscription
fees ($1 200) is also known as Prepaid
Expense.
Prepaid Expense/Payment in Advance
Definition
Are expenses that have been
paid in advance but NOT yet
incurred for the current
accounting period.
Since
expense
Prepaid
isexpense
a debit is
entry.
the
like anIfasset
expense
hadas
to the firm
been
prepaid,
it is similar
to
what
will
be
people
owing
the
naturetoof
services
the
theentry?
firm.
Hence a
DEBIT ENTRY.
Prepaid Expense/Payment in Advance
Scenario 2
Phua CK learnt his lesson last time of not
paying on time last year, so he decides to
pay in advance to “save his face” this year.
The rent expense for the accounting year
of 2001 is $12 000, but he pays $18 000.
Hence he prepaid $6 000 for expenses
that has not been incurred in 2001.
Prepaid Expense/Payment in Advance
Recall that the monthly rent expense is
$1 000. Hence from January to December
2001, the total rent is $12 000.
Phua CK prepaid rent expense of $6 000
for January to June 2002.
1 Jan 2001
31 Dec 2001 30 June 2002
$ 12 000 incurred
$18 000
paid
$6 000
prepaid
JOURNAL
Date
Year 2001
Particulars
Rent Expense (Prepaid)
Dec 31
Debit
Credit
$6 000
Rent Expense
$6 000
RENT EXPENSES a/c
Year 2001
Dec 31 Bank
Year 2001
$18 000 Dec 31 Balance c/d
Profit & Loss
$18 000
Year 2002
Jan 1
Bal b/d
$6 000
$ 6 000
$12 000
$18 000
Profit & Loss Account
2001
Dec 31 Expenses
$12 000
Balance Sheet as at Dec 2001
Current Assets
Prepaid Rent Expense
$6 000
Summary
• Definition
• Credit/Debit nature?
• What are the differences in adjustments
between the accrued and prepaid expenses?
29
Balance Day Adjustments
You have found a part-time job in
MacDonald for three months. Your
monthly salary is $500. By the end of
the first month, you should have
received $500 of what you have
earned. However, the manager is such
a nice person that he gives you
$1 000. (Two months’ salary). He
understands that you need money to
enjoy your school holidays.
30
Balance Day Adjustments
Received
: $500 x 2
(Two month’s salary)
= $1 000
Earned
: $500
Paid in advance : $500
This prepaid of salary (revenue) is
known as Prepaid Revenue /
Outstanding Revenue. $500 is
the prepaid Revenue.
31
Prepaid Revenue/ Outstanding Revenue
DEFINITION
Are revenues received in advance for
which the services not yet
rendered/earned in the particular
accounting year.
Hence the received cash for such
revenues is not considered as revenues
for the current accounting year.
32
Prepaid Revenue/ Outstanding Revenue
Scenario
• Recall that Mr2
Phua CK decided to pay in
advance his rents to “save face”. Hence Mr
Tan received $18 000, in which $12 000 is
the revenue earned for the accounting year
of 2001 and $6 000 is prepaid revenue.
33
Prepaid Revenue/ Outstanding Revenue
1 Jan 2001
31 Dec 2001
$ 12 000 earned
31 June 2002
$6 000 in advance
$18 000
received
JOURNAL
Date
Credit
Year 2001
Dec 31
Particulars
Prepaid Rent Expense
Rent Expense
Debit
$6 000
$6 000
34
Prepaid Revenue/ Outstanding Revenue
RENT REVENUE a/c
Year 2001
Year 2001
Dec 31 Profit & Loss $12 000 Dec 31 Bank
Prepaid rent
Revenue
$18 000
$6 000
$18 000
$18 000
PROFIT AND LOSS a/c
Year 2001
Dec 31 Rent
$12 000
Revenue
35
Prepaid Revenue/ Outstanding Revenue
PREPAID RENT REVENUE a/c
Year 2001
Dec 31 Bal c/d
Year 2002
Jan 1
Bal b/d
Year 2001
$6 000 Dec 31 Rent Revenue $6 000
$6 000
$6 000
$6 000
BALANCE SHEET AS AT 31 DEC 2001
Current Liabilities
Prepaid Revenue
$6 000
36
Balance Day Adjustments - Prepaid Revenue
• Definition
• Nature of the entry
• Distinguish the differences in
adjustments between accrued
revenues and prepaid revenues
37
38
Practice - Accrued and Prepaid
Revenues
Trial Balance as at 31 August 2001
Particulars
Rent
Commission
Debit
$
Credit
$
1 500
7 000
Adjustments
1) $300 of the rent revenue was received in
advance.
2) The monthly commission was $700. The
accounting period is from 1 July 2000 to 31
August 2001
39
Practice - Accrued and Prepaid
Revenues
Particulars
1
JOURNAL
Rent Revenue
Debit
Credit
$
$
300
Prepaid Rent Revenue
300
(Being amount of revenue received in advance)
2
Accrued Commission Revenue
Commission Revenue
1 400
1 400
(Being revenue earned but not yet received)
40
Prepaid Rent Revenue
1
Rent Revenue
Prepaid Rent Rev
Profit & Loss
$
300 Cash at Bank
1 200
$
1 500
Prepaid Rent Revenue
$
Bal c/d
300
$
Rent Revenue
300
Profit & Loss for the year ended 31 Aug 2001
$
Rent Revenue
$
1 200
Balance Sheet as at 31 Aug 2001
$
Current Liability
Prepaid Rent Rev
$
41
300
2
Accrued Commission Revenue
Commission Revenue
$
Profit & Loss
$
8 400 Cash at Bank
Accrued Comm Rev
7 000
1 400
Accrued Commission Revenue
$
Rent Revenue
$
1 400 Bal c/d
1 400
Profit & Loss for the year ended 31 Aug 2001
$
Rent Revenue
$
8 400
Balance Sheet as at 31 Aug 2001
Current Asset
Accrued Comm Rev
$
1 400
$
42
Conclusion
Accrued Expenses
Amount incurred for the
accounting period but not yet
paid for.
Credit
Entry
Prepaid Expenses
Amount not yet incurred for the
accounting period buy have been
paid for.
Debit
Entry
Accrued Revenues
Amount earned for the
accounting period but not yet
received as cash payment.
Debit
Entry
Amount not earned for the
accounting period but have been
paid for.
Credit
Entry
Prepaid Revenues
43
Conclusion
Accrued Expenses
Prepaid Expenses
Accrued Revenues
Prepaid Revenues
Dr Expense A/C
Cr Accrued Expense A/C
Dr Prepaid Expense A/C
Cr Expense A/C
Dr Accrued Revenue A/C
Cr Revenue A/C
Dr Revenue A/C
Cr Prepaid Revenue A/C
44
Conclusion
Accrued Expenses
Current Liability
Prepaid Expenses
Current Assets
Accrued Revenues
Current Assets
Prepaid Revenues
Current Liability
45
46
Practice - Accrued and Prepaid
Expenses
• During the year of 2001, the cash book shows:
• maintenance Expense
• Selling Expense
$ 900
$1 200
• On 31 May 2001, the Balance Sheet also shows
• Prepaid Maintenance Expense
• Accrued Selling expense
$ 400
$ 300
• Find the actual amount of the expenses incurred
for the year of 2001.
47
1
Prepaid Maintenance Expense
Maintenance Expense
$
Cash at Bank
900
$
Profit & Loss
500
Prepaid Maint Exp
400
900
2
900
Accrued Selling Expense
Selling Expense
$
Cash at Bank
Accrued Selling Exp
1 200 Profit & Loss
$
1 500
300
1 500
1 500
48
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