W6: Adjustments

Question 1

Why do we need adjusting entries?

Answer 1

Only arise when accrual-based accouting is adopted

Accrual-based accouting records transactions when they incurred regardless of payment –> some accounts must be ADJUSTED on the LAST DAY of the accouting period

Question 2

What’s accrual-based accounting?

Answer 2

The period in which cash is paid or received DOES NOT COINCIDE with the period in which the expense or income are recognised (incurred)

–> Records transactions when they incurred regardless of payment

Question 3

What is Cash Basis Accouting?

Answer 3

Record revenue when cash is received or paid, not when they are incurred.

Question 4

Accrual basis accounting vs Cash basis accounting

Answer 4

Accrual basis accounting better reflects the present financial position of a business than cash basis accounting

Question 5

What are the 2 classifications of adjusting entries?

Answer 5

Deferrals (repayments)

Accruals (unrecorded)

Question 6

Classification of Deferrals (repayments)

Answer 6

Expenses: Prepaid expense
* Costs/ expenses paid for before they are consued
* E.g. prepaid insurance, prepaid rent
* Asset

Revenue: Unearned revenue
* Revenues that are received priror to being earned
* Liability

Question 7

Prepaid expenses initial entry and adjusting entry

Answer 7

Inital entry:
* Dr: prepaid expense (asset)
* Cr: Cash

Adjusting entry:
* Dr: expense
* Cr: prepaid expense (asset)

Question 8

Deferrals depreciation

depreciation since it’s an asset (like how technology goes obsolete)

Answer 8

• Accounting for non-current asset (loast longer than a year, have future economic benefits –> used up over many periods)
• Allocation of the historic cost as an asset to expense (less any residual) over the useful life of that asset
  • As the assets are used, the future economic benefit are consumed –> must be expensed –> depreciation expense

Question 9

Accumulated depreciation

Answer 9

• This is the result of deferrals depreciation

Accumulated depreciation
* Is a contra asset - represents the total amount of the assets’s costs that has been charged to depreciation expense over the periods
* Has a normal Cr balance (assets has normal Dr balance)

Account name:
* depreciation expense - dr
* accumulated depreciation - cr

Question 10

Unearned revenue intial entry and adjusting entry

Answer 10

Inital entry:
* Dr: Cash
* Cr: unearned revenue or revenue recieved in advance (liability)

Adjusting entry:
* Dr: Uneared revenue (liability)
* Cr: Revenue

Question 11

Classification of Accrurals (unrecorded)

Answer 11

Expenses: Accured expense
* Expense incurred but not yet paid
* Liability

Revenue: Accrued Revenue
* Revenue earned but not yet received (i.e. credit) to customers
* e.g. credit card
* Asset

Question 12

Accrued expenses adjusting entry

Answer 12

Adjusting entry:
* Dr: Expense
* Cr: Expense payable (liability)

Question 13

Accrued revenue adjusting entry

Answer 13

Adjusting entry:
* Dr: receivable (asset) (e.g. accounts receivable)
* Cr: revenue

Question 14

Why is prepaid expenses an asset?

Answer 14

Because they provide future economic benefits.

Overtime the future benefit are ‘consumed’ or ‘expired’. The consumed/expired portion needs to be reocrded as an expense