BU8101

BU8101
Accounting:
Accounting:A
A User Perspective
User Perspective

Lecture 2
The Accounting Cycle

© Lau Yin Kheng

 Learning Outcomes

Once you have completed this lesson, you should be

able to:
1. Demonstrate how accounting measures and records
business activities.
2. Explain the accrual basis of accounting.
3. Explain reasons for adjusting entries, identify and
prepare adjusting entries.

© Lau Yin Kheng

 Learning Objectives

1. Demonstrate how accounting measures and records

business activities.
2. Explain how revenues and expenses are recognized.
3. Compare accrual and cash basis accounting.
4. Identify and record adjusting entries at the end of an
accounting period.
5. Prepare financial statements from adjusted trial
balance.

© Lau Yin Kheng

 Learning Objective 1
DEMONSTRATE HOW ACCOUNTING
MEASURES AND RECORDS BUSINESS
ACTIVITIES

© Lau Yin Kheng

LO 1

Journal Entry Format

The price of a
box of biscuits

No
Based
entryonisthe
recorded
monetary
as
there is no
unitmonetary
assumption
transaction

Only transactions denominated

in monetary value are recorded

© Lau Yin Kheng

LO 1

Journal Entry Format

Provide a reference Debits are written first.

date for each transaction.

Date Description Debit Credit

02/1 Cash 12,000
Capital Stock 12,000
To record an investment
by the owners.
Credits are indented and Total debits must equal
written after debits. total credits.

A typical journal entry might look like this.

© Lau Yin Kheng
LO 1

The Ledger

Accounts are individual

Cash
records showing increases
and decreases.
Accounts
Payable
The entire group of accounts
Capital
is kept together in an
Stock accounting record called
a ledger.

© Lau Yin Kheng

LO 1

The Use of Accounts

Title of the Account
An account can be
illustrated in a Left Right
T-account form. or or
Debit Credit
Side Side
An Increases are
recorded on one
side of the
T-account, and Left
Left isis
Right isfor
fordebit…
for debit..
credit..
decreases are Right
Left is is for
for debit..
credit..
recorded on the
other side.

© Lau Yin Kheng

LO 1

Double-Entry Accounting
Debits and credits affect accounts as follows:

A = L + OE
ASSETS LIABILITIES EQUITY

Debit Credit Debit Credit Debit Credit

+ - - + - +
Normal Normal Normal
Balance Balance Balance
Debit Credit Credit

© Lau Yin Kheng

LO 1

Double-Entry Accounting
Equity Retained earnings

Capital
Stock - Dividends + Revenues - Expenses

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
Normal Normal Normal Normal
Balance Balance Balance Balance
Credit Debit Credit Debit
© Lau Yin Kheng
LO 1
Double Entry Accounting
The Equality of Debits and Credits

A = L + OE
=
Debit balances Credit balances

In the double-entry accounting system, every

transaction is recorded by equal dollar amounts of
debits and credits.

© Lau Yin Kheng

LO 1

The Bookkeeping Process

Let’s prepare some

journal entries and post
them to the ledger for
Barry Best Biscuit
Company

© Lau Yin Kheng

LO 1

Barry and Best invested $12,000 in the company.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2/1 Cash (A+) 12,000
Capital Stock (OE+) 12,000
Owners invested $12,000

Cash Capital Stock

2/1 2/1

12,000 12,000
Cash increases $12,000 Capital stock increases
© Lau Yin Kheng
with a debit $12,000 with a credit
LO 1

Truck costing $25,000 was purchased for $3,000 cash

and signing a note payable for $22,000.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
5/1 Truck (A+) 25,000
Cash (A-) 3,000
Notes Payable (L+) 22,000
Purchase truck with cash and notes payable

Let’s see how to post this entry . . .

© Lau Yin Kheng

LO 1

Truck costing $25,000 was purchased for $3,000 cash

and signing a note payable for $22,000.
Truck
5/1 25,000

25,000

Truck increases $25,000

with a debit

Cash Notes Payable

2/1 12,000 5/1 3,000 5/1 22,000

9,000 22,000

Cash decreases $3,000 Notes Payable increases

with a credit $22,000 with a credit
© Lau Yin Kheng
LO 1

Purchased office equipment for $4,000 on account.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
6/1 Office Equipment (A+) 4,000
Accounts Payable (L+) 4,000
Purchase of office equipment

Office Equipment Accounts Payable

6/1 4,000 6/1 4,000

4,000 4,000

Office Equipment increases Accounts Payable increases

$4,000 with a debit $4,000 with a credit
© Lau Yin Kheng
LO 1

Purchased biscuits from the bakery at a cost of $6,000

on account.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
7/1 Inventory [10,000 x 0.60] (A+) 6,000
Accounts Payable (L+) 6,000
Purchase of inventory

Inventory Accounts Payable

7/1 6,000 6/1 4,000
7/1 6,000

6,000 10,000

Inventory increases $6,000 Accounts Payable increases

with a debit $6,000 with a credit
© Lau Yin Kheng
LO 1

The company sold 450 boxes at $30, of which 200 boxes

were on account.
GENERAL JOURNAL Page 1
Date Account Titles and Explanation Debit Credit
var Cash [250 x 30] (A+) 7,500
Accounts Receivable [200 x 30] (A+) 6,000
Sales Revenue (R+) (OE+) 13,500
Sold biscuits on account and cash
Cash Accounts Receivable Sales Revenue
2/1 12,000 5/1 3,000 var 6,000 var 13,500
var 7,500

16,500 6,000 13,500

Cash increases $7,500 AR increases $6,000 Revenue increases

with a debit with a debit $13,500 with a credit
© Lau Yin Kheng
LO 1

Each box of the 450 biscuits sold consist of 20 biscuits

cost $12 per box.
GENERAL JOURNAL Page 1
Date Account Titles and Explanation Debit Credit
var Cost of goods sold (E+)(OE-) 5,400
Inventory [450 x 20 x 0.60] (A-) 5,400
Cost of the 450 boxes of biscuits sold

Cost of goods sold Inventory

var 5,400 7/1 6,000 var 5,400

5,400 600

Cost of goods sold increases Inventory decreases $5,400

$5,400 with a debit with a credit
© Lau Yin Kheng
LO 1

The company paid in total $4,100 for supplies used $300,

rent $600, salaries $3,000 and utilities $200.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
var Rent Expense (E+)(OE-) 600
Salaries Expense (E+)OE-) 3,000
Supplies Expense (E+)(OE-) 300
Utilities Expense (E+)(OE-) 200
Cash (A-) 4,100
Paid a $4,100 cash for expenses

Let’s see how to post this entry . . .

© Lau Yin Kheng
LO 1

The company paid in total $4,100 for supplies used $300,

rent $600, salaries $3,000 and utilities $200.
Rent Expense Salaries Expense
var 600 var 3,000
600 3,000

Rent expense increases Salaries expense increases

$600 with a debit $3,000 with a debit
Supplies Expense Utilities Expense
var 300 var 200
300 200

Supplies expense increases Utilities expense increases

$300 with a debit $200 with a debit
Cash
2/1 12,000 5/1 3,000
var 7,500 var 4,100

12,400

Cash decreases $4,100

© Lau Yin Kheng with a credit
LO 1

Assets = Liabilities + Owners’ Equity

Cash Accounts Payable Owner's Capital
2/1 12,000 5/1 3,000 6/1 4,000 2/1 12,000
var 7,500 var 4,100 7/1 6,000
12,000
12,400 10,000
Sales Revenue
Accounts Receivable var 13,500
Notes Payable
var 6,000 5/1 22,000
13,500

Cost of goods sold

6,000
var 5,400
22,000
Inventory 5,400
7/1 6,000 var 5,400
Rent Expense
Month end var 600
600
600
balances are listed
Salaries Expense
5/1
Truck
25,000
with debits on one var 3,000
3,000
25,000
column and credits
Supplies Expense
Office Equipment
on another column var 300
6/1 4,000 to form a trial 300

Utilities Expense
4,000 balance var 200
200
© Lau Yin Kheng
LO 1
Trial Balance for
Barry Best Biscuit Company
Barry Best Biscuit Company
Unadjusted Trial Balance
All balances are 31 January 2015
taken from the Cash $ 12,400
ledger accounts on Accounts receivable 6,000
Inventory 600
31 January after Office Equipment 4,000
considering all of Truck 25,000
Accounts payable $ 10,000
Barry Best’s Notes payable 22,000
transactions for the Capital stock 12,000
month. Service revenue 13,500
Cost of goods sold 5,400
Rent expense 600
Salaries expense 3,000
Supplies expense 300
Utilities 200
Debits = Credits. Total $ 57,500 $ 57,500

© Lau Yin Kheng

LO 1
Trial Balance for
Barry Best Biscuit Company
Assets Barry Best Biscuit Company
Cash Unadjusted Trial Balance
2/1 12,000 5/1 3,000
var 7,500 var 4,100 31 January 2015
12,400
Cash $ 12,400
Accounts receivable 6,000
Accounts Receivable
var 6,000 Inventory 600
Office Equipment 4,000
6,000
Truck 25,000
Inventory Accounts payable $ 10,000
7/1 6,000 var 5,400
Notes payable 22,000
600
Capital stock 12,000
Service revenue 13,500
Truck
5/1 25,000
Cost of goods sold 5,400
Rent expense 600
25,000
Salaries expense 3,000
Office Equipment Supplies expense 300
6/1 4,000
Utilities 200
4,000 Total $ 57,500 $ 57,500
© Lau Yin Kheng
LO 1
Trial Balance for
Barry Best Biscuit Company
Liabilities Barry Best Biscuit Company
Unadjusted Trial Balance
Accounts Payable
6/1 4,000
31 January 2015
7/1 6,000 Cash $ 12,400
10,000 Accounts receivable 6,000
Inventory 600
Office Equipment 4,000
Notes Payable
5/1 22,000
Truck 25,000
Accounts payable $ 10,000
22,000
Notes payable 22,000
Capital stock 12,000
Service revenue 13,500
Cost of goods sold 5,400
Rent expense 600
Salaries expense 3,000
Supplies expense 300
Utilities 200
Total $ 57,500 $ 57,500
© Lau Yin Kheng
LO 1
Trial Balance for
Barry Best Biscuit Company
Owners’ Equity Barry Best Biscuit Company
Unadjusted Trial Balance
Owner's Capital
2/1 12,000 31 January 2015
12,000
Cash $ 12,400
Sales Revenue Accounts receivable 6,000
var 13,500
13,500 Inventory 600
Cost of goods sold
Office Equipment 4,000
var 5,400 Truck 25,000
5,400
Accounts payable $ 10,000
Rent Expense
var 600
Notes payable 22,000
600 Capital stock 12,000
Salaries Expense
Service revenue 13,500
var 3,000 Cost of goods sold 5,400
3,000
Rent expense 600
Supplies Expense Salaries expense 3,000
var 300
300 Supplies expense 300
Utilities 200
Utilities Expense
var 200
200
Total $ 57,500 $ 57,500
© Lau Yin Kheng
 How Much Profit
Our Company Has Earned?
Barry and Best have recorded transactions for January 2015. However,
certain items were not considered in the records. They are currently in
discussion with their NBS accounting professor.

Barry: We have not
accounted for the interest we
owe NTU Bank for the note
payable and the use of the
truck and office equipment
we purchased in January.
Best: Does it really matter if
interest is not taken up in
January since we can record
interest in the month we pay
the interest to NTU Bank?
© Lau Yin Kheng
Prof: You are right. You need to expand
the accounting system that you have
created earlier to include all transactions
that should be recorded in each month.
Prof: To ensure that the financial
statements present fairly the state of
affairs of your business, you need to
follow accounting rules to recognize
revenues and expenses.
Prof: Let’s look at these rules and
learnt how they can be applied to your
company.
 End of Learning Objective

You have come to the end of this

Learning Objective !

Try the review questions that

follow…

© Lau Yin Kheng

 Learning Objective 2
EXPLAIN HOW REVENUES AND
EXPENSES ARE RECOGNISED

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LO 2
What Does
Net Income Tell Users?
Expenses are the cost of
assets consumed or
services used in the process
of earning revenue.

Revenues Expenses
= Net Income

Revenues result from business Net income is one of the

activities entered into for the key financial measures
purpose of earning income. tracked by investors.

Past performance does give some indication of future

© Lau Yin Kheng
expectations for growth or decline.
LO 2
What Does
Net Income Tell Users?
(In Singapore Dollars)
Net Income must be
Note 2014
$'000 related to a specified
period of time.
Turnover 30 551,856
Cost of Sales (454,607)
Gross Profit 97,249
Other operating income 31 4,086
It is true only if we
Distribution and selling expenses (16,118) state that it is the
Administrative expenses (61,926) average net income
Other operating expenses (7,975) per day in 2014.
Profit from operations 33 15,316
Financial income 34 1,526
Financial expenses 34 (673)
Share of losses of associate -
Is it true that
Profit before tax 16,169 Popular earned a
Income tax expenses 35 (5,565) net income of
Profit for the year, net of tax 10,604 about $29,000 in
2014?
© Lau Yin Kheng
LO 2

Time Period Concept

To provide users of financial statements with timely
information, net income is measured for relatively short
accounting periods of equal length.

Annually
1 2
Semiannually
1 2 3 4
Quarterly
1 2 3 4 5 6 7 8 9 10 11 12
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Interest Monthly
© Lau Yin Kheng
LO 2

Time Period Concept

Accrual Basis Accounting

Accounting Information

Revenues Expenses

recognize revenue when we provide goods or

services and recognize expenses to match
with revenue.

© Lau Yin Kheng

LO 2
Revenue Recognition Principle
When To Recognize Revenue
 Revenue is recognized and recorded in the accounting period
it is earned (not when cash is received).
 Revenue is considered earned at the time when performance
obligation is satisfied.
 Performance obligation arises when a company agrees to
perform a service or sell a product to a customer.
Dr Accounts Receivable (A+)
Cr Sales Revenue (R+)(OE+)
Cash not received but sales revenue is earned

Dr Cash (A+)
Cr Unearned Revenue (L+)
Cash received but revenue has not been earned

© Lau Yin Kheng

LO 2
Revenue Recognition Principle
When To Recognize Revenue

Buy air ticket with cash from SIA in January

Can SIA recognize revenue in January?

No, because SIA has yet to provide the services in January

Liability
• Unearned Revenue
• Deferred Liability
© Lau Yin Kheng
LO 2
The Matching Principle
When To Record Expenses
All resources consumed in earning revenues are:
 Recorded as expenses when incurred
(not when cash is paid)
 Matched with revenues recorded in the same period.

Whenexpense
Transport should we
forrecognize the transport
January should expense,
be matched against
January’s revenues,
in January orifFebruary?
even it was paid in February.

Dr Transport Expense (E+)(OE-)

Cr Accounts Payable (L+)
Cash not paid but expense incurred

Dr Prepaid Expense (A+)

Cr Cash (A-)
Cash paid but expense has not been incurred
© Lau Yin Kheng
LO 2
The Matching Principle
When To Record Expenses
Costs are matched with revenues in 3 ways

Direct Systematic
association of allocation of
When
costs with costs over
incurred in
specific the “useful
the period
revenue life” of the
transactions expenditure
Cost of Depreciation Utilities
goods sold of truck

© Lau Yin Kheng

 End of Learning Objective

You have come to the end of this Learning

Objective!

Try the review questions that follow.

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 Learning Objective 3

COMPARE ACCRUAL AND CASH

BASIS ACCOUNTING
© Lau Yin Kheng
LO 3

Accrual Basis vs. Cash Basis

Accrual Basis Cash Basis

Adheres to: Revenues are
recognized when cash is
Realization and matching
received and expenses
principles.
recorded when cash is
Revenues are recognized paid.
when earned and
expenses are recognized Not GAAP
when incurred.

© Lau Yin Kheng

LO 3
Why The Cash Basis
Doesn’t Work?
 Popular Book Store makes a sale on account for $800.
 Which transaction increases Popular’s wealth:
Jan 20 Feb 18

$800 sale on account Collected $800 cash

 Making the sale itself increases their wealth since they got a
receivable worth $800.
 If Popular waits until the cash is collected, their financial
statements would be misleading:
 Balance sheet: Assets (accounts receivable of $800)
understated.
 Income statement: Revenue and net income understated
by $800.
© Lau Yin Kheng
 End of Learning Objective

You have come to the end of this Learning

Objective!

Try the review questions that follow.

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 Learning Objective 4
IDENTIFY AND RECORD
ADJUSTING ENTRIES AT THE
END OF AN ACCOUNTING
PERIOD
© Lau Yin Kheng
LO 4

Purpose of Adjusting Entries

Required at the Ensure revenues
end of each and expenses are
accounting recognized in the
period. correct accounting
period.
Necessary because
unadjusted trial
balance may not
contain up-to-date
and complete data.

© Lau Yin Kheng

LO 4

Types of Adjusting Entries

Deferrals or Prepayments Accruals
1. Converting assets 3. Accruing Uncollected
(Prepaid Expenses) Revenue (assets).
to expenses.
Result from cash Result from revenue
payment BEFORE recorded BEFORE
expense recorded cash receipt

2. Converting liabilities 4. Accruing Unpaid

(Unearned Revenues) Expenses (liabilities).
to revenues.
Result from cash Result from expense
receipt BEFORE recorded BEFORE
revenue recorded cash payment
© Lau Yin Kheng
LO 4

Prepaid Expenses
Current period Future periods

Costs provide future As assets are

benefits, record as used, record as
assets expenses
Adjusting Entry for Prepaid Expense

Date Description Debit Credit

Expense Amount
Asset Amount
Omission of Adjusting Entry

© Lau Yin Kheng

LO 4

Prepaid Expenses
 On 1 February, 2015, Barry Best Biscuit Company paid
$7,200 for a 1-year rental of an office space.
 The entry to record the rental was:
Date Description Debit Credit
Feb 1 Prepaid Rent (A+) 7,200
Cash (A-) 7,200

< 1- year rent >

1/2/15 28/2/15 31/3/15 30/4/15

Month end Month end Month end

At 28/2/15, how much of the

rent has been used?
© Lau Yin Kheng
LO 4
Converting Asset (Prepaid Rent)
To Expense

On 28 Feb. 2015, Barry Best adjusts the Prepaid Rent

account to reflect the use of the rent :

Date Description Debit Credit

Feb 28 Rent Expense (E+)(OE-) 600
Prepaid Rent (A-) 600

Prepaid Rent Rent Expense

1/2 7,200 28/2 600 28/2 600

Bal. 6,600 Bal. 600

© Lau Yin Kheng

LO 4

The Concept of Depreciation

Depreciable assets are physical objects that retain their size

and shape but lose their economic usefulness over time.

Depreciation is the systematic allocation of the cost of an

asset to the fiscal periods that benefit from the asset’s use.
© Lau Yin Kheng
LO 4

The Concept of Depreciation

The portion of an asset’s utility that is used up must be
expensed in the period used.

Fixed Asset Depreciation

(debit) The asset’s Expense
usefulness is (debit)
partially consumed
On date when during the period.
initial payment At end of
is made . . . period . . .

Accumulated
Depreciation
Cash
(credit)
(credit)
© Lau Yin Kheng
LO 4

Depreciation Is Only An Estimate

Truck is estimated to be used for 100 months

5/1/15 6/1/15 31/1/15 28/2/15 31/3/15 30/4/15

Month end Month end Month end Month end

Office Equipment is estimated to be used for 50 months

 Barry Best acquired a truck and an office equipment on 5th

January and 6th January respectively. Assets acquired during
the 1st half of the month are depreciated for a full month.
 At 31/1/15, how much depreciation expense should be
recognized by Barry Best?
© Lau Yin Kheng
LO 4
Converting Asset (Prepaid Expense)
To Expense - Truck
$25,000 100 months = $250 per month

Date Description Debit Credit

Jan 31 Depreciation Expense-Truck (E+)(OE-) 250
Accumulated Depreciation-Truck (A-) 250
Feb 28 Depreciation Expense-Truck (E+)(OE-) 250
Accumulated Depreciation-Truck (A-) 250

Contra-asset
Acc Depn - Truck Depreciation - Truck
31/1 250 31/1 250

28/2 250 28/2 250

© Lau Yin Kheng

LO 4
Converting Asset (Prepaid Expense)
To Expense – Office Equipment
$4,000 50 months = $80 per month

Date Description Debit Credit

Jan 31 Depn Expense-Off Equip (E+)(OE-) 80
Accumulated Depn-Off Equip (A-) 80
Feb 28 Depn Expense-Off Equip (E+)(OE-) 80
Accumulated Depn-Off Equip (A-) 80

Contra-asset

Acc Depn – Office equipment Depreciation – office equipment

31/1 80 31/1 80

28/2 80 28/2 80

© Lau Yin Kheng

LO 4

The Concept of Depreciation

 So what’s the point of a separate accumulated depreciation
account?
 Assume the following information for two airlines.
 Any insights?

Keep track of original cost and of age of assets

SIA Cathay Pacific

Equipment, at cost 1,000,000 1,000,000
Accumulated depreciation (100,000) (800,000)
Net book value 900,000 200,000

© Lau Yin Kheng

LO 4
Accounting for Prepaid Expenses
Impact on Financial Statements
Prepaid expenses
recorded in assets
accounts have been
used over time.
Accounts before adjustment
Assets overstated
Expenses understated
Adjusting entry
Dr. Expenses
Cr. Assets
or Contra Assets

E.g. Supplies, Rent,

Insurance, Depreciation
© Lau Yin Kheng
LO 4

Unearned Revenues
Current period Future periods

Received cash in Performance

advance, record obligation satisfied,
unearned revenue record revenue
Adjusting Entry for Unearned Revenue
Date Description Debit Credit
Unearned Revenue (Liability) Amount
Revenue Amount
Omission of Adjusting Entry

© Lau Yin Kheng

LO 4

Unearned Revenues
On 20 February, Barry Best collected $3,200 from Fresh Cafe for
100 boxes of biscuits at $32 to be delivered on 28 February and 10
March 2015.
Date Description Debit Credit
Feb 20 Cash (A+) 3,200
Unearned Revenue (L+) 3,200
LIABILITY account

Received $3,200 for biscuits to be delivered in two batches

20/2/15 28/2/15 10/3/15

Collected cash Delivery of 50 boxes Delivery of 50 boxes

© Lau Yin Kheng

LO 4

Unearned Revenues
On 28 February, Barry Best adjusts the Unearned Revenue account
to reflect the sales that has been earned. At the same time, Barry
Best has to recognized the cost of the sales

Date Description Debit Credit

Feb 28 Unearned Revenue [50 x 32] (L-) $1,600
Sales Revenue (R+)(OE+) 1,600
Cost of Goods Sold (E+)(OE-)
Inventory (A-)

Unearned Revenue Sales Revenue

28/2 1,600 20/2 3,200 28/2 1,600

Bal. 1,600 Bal. 1,600

© Lau Yin Kheng

LO 4
Accounting for Unearned Revenues
Impact on Financial Statements
Unearned revenues recorded in
liability accounts are now
recognized as revenue for
services performed.
Accounts before adjustment
Liabilities overstated
Revenues understated
Adjusting entry
Dr. Liabilities
Cr. Revenues
E.g. Rent, Air tickets,
Magazine subscriptions,
Customer deposits
© Lau Yin Kheng
LO 4

Accrued Revenues
Current period Future periods

Provided goods Received cash for

or services the goods or services

Adjusting Entry for Accrued Revenue

Date Description Debit Credit

Asset Amount
Revenue Amount
Omission of Adjusting Entry

© Lau Yin Kheng

LO 4

Accrued Revenues
 Barry Best earned $10 interest on their bank account, which will
be received on 1 February 2015.
 On 31 January 2015, Barry Best makes the following adjusting
entry to reflect interest earned:

Date Description Debit Credit

Jan 31 Interest Receivable (A+) 10
Interest Revenue (R+)(OE+) 10

Interest Receivable Interest Revenue

31/1 10 31/1 10

Bal. 10 Bal. 10

© Lau Yin Kheng

LO 4
Accounting for Accrued Revenues
Impact on Financial Statements
Services performed
but not received in
cash or recorded

Accounts before adjustment

Assets understated.
Revenues understated
Adjusting entry
Dr. Assets
Cr. Revenues

E.g. Interest, Services,

Goods delivered not billed
© Lau Yin Kheng
LO 4

Accrued Expenses
Current period Future periods

Incurred costs to Paid cash for

produce revenue the costs

Adjusting Entry for Accrued Expense

Date Description Debit Credit

Expense Amount
Liability Amount
Omission of Adjusting Entry

© Lau Yin Kheng

LO 4

Accrued Expenses
On 31 January 2015, Barry Best adjust for interest due on the note
payable of $22,000 at 8% per annum due on the 1st working day of
the following month. NTU Bank billed the company $123 for the use
of the loan from 5 to 31 January.

Date Description Debit Credit

Jan 31 Interest Expense (E+)(OE-) $123
Interest Payable (L+) $123
Interest Expense Interest Payable

31/1 123 31/1 123

Bal. 123 Bal 123

© Lau Yin Kheng

LO 4
Accounting for Accrued Expenses
Impact on Financial Statements
Expenses have been
incurred but not yet
paid in cash or
recorded
Accounts before adjustment
Expenses understated.
Liabilities understated
Adjusting entry
Dr. Expenses
Cr. Liabilities
E.g. Interest, Salaries,
Income taxes
© Lau Yin Kheng
LO 4

Accounting Estimates
 Estimates of certain expenses are required at year end so as
to account for all expenses relating to the income earned
during the year.
 Some of these estimates are:
 Income taxes….

 Impairment loss of Accounts Receivable

 Depreciation

Date Description Debit Credit

Jan 31 Income Tax Expense (E+)(OE-) $600
Income Tax Payable (L+) $600
To accrue for income tax expense for Barry Best

© Lau Yin Kheng

LO 4

The Concept of Materiality

An item is “material” if knowledge of the item might reasonably
influence the decisions of users of financial statements.

Many companies
immediately charge the
cost of immaterial items
to expense.

Waste Paper Supplies Lightbulbs

Baskets
© Lau Yin Kheng
 End of Learning Objective

You have come to the end of this Learning

Objective!

Try the review questions that follow.

© Lau Yin Kheng

 Learning Objective 5

PREPARE FINANCIAL STATEMENTS

FROM ADJUSTED TRIAL BALANCE

© Lau Yin Kheng

LO 5 Barry Best Biscuit Company
Unadjusted Trial Balance
31 January 2015 Adjustments Adjusted TB
Dr Cr Dr Cr Dr Cr
Cash $12,400 $12,400
Accounts receivable $6,000 $6,000
Adjusted Trial Interest receivable $10 $10
Balance Inventory $600 $600
Office Equipment $4,000 $4,000
All balances are Acc depn-Off Equip $80 $80
Truck $25,000 $25,000
taken from the Acc depn-Truck $250 $250
ledger accounts Accounts payable $10,000 $10,000
Interest payable $123 $123
on 31 January Income tax payable $605 $605
after month end Notes payable $22,000 $22,000
Capital stock $12,000 $12,000
adjusting Retained earnings 0 0
entries. Service revenue $13,500 $13,500
Interest revenue $10 $10
Cost of goods sold $5,400 $5,400
Rent expense $600 $600
Salaries expense $3,000 $3,000
Supplies expense $300 $300
Utilities $200 $200
Interest expense $123 $123
Depreciation-Off Equip $80 $80
Depreciation-Truck $250 $250
Income tax expense 605 $605
© Lau Yin Kheng Total $57,500 $57,500 $1,068 $1,068 $58,568 $58,568
LO 5 Barry Best Biscuit Company
Adjusted Trial Balance
31 January 2015
Dr Cr
Cash $12,400
Accounts receivable $6,000 Balance Sheet
Interest receivable $10
Inventory $600 Assets
Office Equipment $4,000 =
Acc depn-Off Equip $80 Liabilities
Truck $25,000
Statement of Acc depn-Truck $250 +
Accounts payable $10,000 Shareholders’
Changes in Equity Interest payable $123 Equity
Income tax payable $605
Capital stock Notes payable $22,000
+ Capital stock $12,000
Retained earnings 0
Retained earnings Service revenue $13,500
(= Beg RE + NI – Div) Interest revenue $10 Income Statement
= Cost of goods sold $5,400
Rent expense $600 Revenues
Shareholders’ Salaries expense $3,000 _
Equity Supplies expense $300
Utilities $200 Expenses
Interest expense $123 =
Depreciation-Off Equip $80
Depreciation-Truck $250 Net Income
Income tax expense $605
Total $58,568 $58,568
© Lau Yin Kheng
LO 5

Preparing Financial Statements

 Accounting rules prescribe the basis for the presentation of financial
statements. Comparative information in respect of the preceding
period for all amounts reported in the current period’s financial
statements are required.
 A complete set of financial statements comprises:
1. A statement of financial position (Balance Sheet)
2. A statement of profit or loss and other comprehensive income
(expenses classified by nature and function)
3. A statement of changes in equity
4. A statement of cash flows, and
5. Notes to the financial statements

NB: Presentation requirements for other comprehensive income, statement

of changes in equity and statement of cash flows will be highlighted in the
weeks when we discuss these topics more extensively.
© Lau Yin Kheng
LO 5
Statement of Financial Position
(Balance Sheet)
Accounting rules require current and non-current distinction
Barry Best Biscuit Company
Balance Sheet
31-Jan-15
Assets Liabilities & Shareholders' Equity
Current Assets Current Liabilities
Cash $12,400 Accounts payable $10,000
Accounts receivable 6,000 Interest payable 123
Interest receivable 10 Income tax payable 605
Inventory 600 10,728
19,010 Non-Current Liabilities
Non-Current Assets Notes payable 22,000
Office equipment $4,000 Total Liabilities 32,728
Less: Accumulated depreciation 80 3,920 Shareholders' Equity
Truck 25,000 Capital stock $12,000
Less: Accumulated depreciation 250 24,750 Retained earnings 2,952
28,670 Total shareholders' equity 14,952
Total liabilities & shareholders'
Total Assets $47,680 equity $47,680

© Lau Yin Kheng

LO 5
Statement of Profit or Loss and Other
Comprehensive Income
Barry Best Biscuit Company
Single statement format or 2 Statement of Comprehensive Income
statement format For the Month Ended 31 January, 2015
Sales Revenue $13,500
Net profit or net income is a Less: Cost of Goods Sold 5,400
Gross Profit 8,100
measure of the overall Less: Operating Expenses
performance of the company Rent Expense $600
Supplies Expense 300
during a period.
Salaries Expense 3,000
Utilities Expense 200
Other comprehensive income Interest Expense Profit or Loss 123
include unrealised gains or Depreciation: Truck 80
Depreciation: Off Equip 250 4,553
losses arising from changes in
Operating profit 3,547
fair value of some assets. Interest income 10
Interest Expense (123)
The comprehensive income Profit before tax 3,557
Tax expense @17% 605
measures the overall change in
Net profit or net income $2,952
the company’s wealth during a Other comprehensive Income (OCI) 0
period. Total Comprehensive Income OCI $2,952

© Lau Yin Kheng

LO 5
Statement of Profit or Loss and Other
Comprehensive Income
 Minimum information to be disclosed in the statement of
comprehensive income includes:
 Revenue
 Finance cost
Profit or Loss
 Tax expense
 Profit for the year
 Each component of other comprehensive income classified by
nature and grouped into those that:
OCI
• Will not be reclassified subsequently to P/L
• May be reclassified subsequently to P/L
 Total comprehensive income
 Non-operating income and expenses, such as interest income,
interest expense and gains or losses are reported below operating
income.
 Gains or losses are money made or lost on activities outside the
normal business of a company. For e.g. gains from sale of assets.
© Lau Yin Kheng
LO 5

Preparing Financial Statements

Barry Best Biscuit Company
Statement of Changes in Equity
For the Month Ended 31 January 2015

Beginning equity, 1 Jan 2015 $ -

Add: Issuance of shares 12,000
NB: Presentation Add: Net income 2,952
requirements for Ending equity, 31 Jan 2015 $14,952

statement of changes Barry Best Biscuit Company

in equity and Statement of Cash Flows
statement of cash For the Month Ended 31 January 2015
flows will be discussed Cash flows from operating activities:
Cash received from revenue transactions $ 7,500
in other weeks. Cash paid for expenses 4,100
Net cash provided by operating activities $ 3,400
Cash flows from investing activities:
Purchase of PPE (3,000)
Net cash used by investing activities (3,000)
Cash flows from financing activities:
Investment by owners 12,000
Increase in cash for month $ 12,400
Cash balance, 1 Jan 2015 -
Cash balance, 31 Jan 2015 $ 12,400
© Lau Yin Kheng
LO 5

Notes to the Financial Statements

General information
• Place of domicile
• Registered office
Notes to the • Principal activities
Financial Statements Significant accounting policies
• Measurement basis used
• Sources of estimation uncertainty
Explanatory notes
• Further details of items in the financial
statements e.g. Share capital, bank loans,
etc.
Other disclosures
• Directors’ remuneration, segment reporting,
unusual and related party transactions,
contingencies, significant post balance
sheet events, etc

© Lau Yin Kheng

LO 5

The Accounting Cycle

1. Record
transactions in
journals
8. Prepare after 2. Post entries
closing trial to the ledger
balance accounts

7. Journalize
3. Prepare trial
and post closing
balance
entries

6. Prepare 4. Make end-of-

financial period
statements adjustments

5. Prepare
adjusted trial
balance
© Lau Yin Kheng
 End of Learning Objective

You have come to the end of this Learning Objective!

© Lau Yin Kheng