Balance Day Adjustments Flashcards
Introduction
A business that is using accrual accounting will often have to change the amounts in some income and expense ledger accounts before the profit or loss is calculated. These entries are known as balance day adjustments.
Why do balance day adjustment happen?
Balance day adjustments are made to ensure that the correct amount of income and expense is included in the profit and loss ledger account and that all the current assets and current liabilities are shown in the balance sheet.
What is Prepaid Expenses?
A prepaid expense is a service paid for in advance
How is a Prepaid Expense recorded?
A prepaid expense (Nature: Asset) is debited to an asset ledger account when it is paid.
At the end of an accounting period the prepaid expense that has been consumed is transferred to an expense ledger account.
What is Inventory of Supplies?
Supplies are resources purchased for use within the business and will be consumed within one year (Current Asset).
How is Inventory of Supplies recorded?
Supplies (Current Asset), when purchased, are debited to an asset ledger account.
At the end of an accounting period the supplies that have been consumed are transferred to an expense ledger account.
What is Accrued Expenses?
Accrued expenses are expenses generated in an accounting period but have not been paid by the end of that period.
How is Accrued Expenses recorded?
An adjusting entry must be made in the accounting system to ensure that the accrued expenses are included in the calculation of the profit or loss for the current period and shown in the balance sheet.
On balance day the relevant expense account is debited with the unpaid expense, and an accrued expenses (Liability) account is credited.
When will the Accrued Expenses account be closed?
The accrued expenses account will always remain open until it has been paid off in the next accounting period.
#E.g) The accrued expenses account is closed when the wages owing are paid in the next accounting period.
What is Unearned Income?
Unearned Income (Nature: Liability) is money received from a customer for a service that will be performed in the future or money received from a customer for inventory that will be supplied in the future.
#Unearned Income is also known as:
- Income received in advance
- Prepaid income
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How is Unearned Income recorded?
-Deducting the amount of the income received in advance from the related income account on the credit side of profit and loss account.
-Record the amount of income received in advance under current liabilities in the balance sheet.
Related Income Account (Debited)
Income Received in Advance (Credited)
Why is Unearned Income, not a Income account but a Liability account?
Unearned Income is a liability since it is money received for a future obligation.
Meaning the business has a obligation to perform the service or supply the customer at a future time.
Under accounting framework a liability is a present obligation.
What is Accrued Income?
Accrued Income( Nature: Asset) is an amount of money owing to a business, from an income transaction, that has not been received by balance date.
How is Accrued Income Recorded?
-Accrued Income Account(Debited)
-Affected Account (Credited)
When will the Accrued Income Account be closed?
The accrued income account will always remain open until it has been received in the next accounting period.
#E.g) The accrued income account is closed when the interest income is received in the next accounting period.
