Accounting Practices 501

Chapter 8

Balance Day Adjustments

(Accrued expenses & Prepaid expenses)

Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

Accrued Expenses

Ch8B - Accrued & Prepaid expenses

2

DrWages 80,000

Additional informationWages still owing at balance date $10,000

These are expenses which have already been incurred, but have not yet been paid for or recorded

Extract from Trial Balance as at 31 March Cr

Accrued Expenses

Ch8B - Accrued & Prepaid expenses

3

DrWages 80,000

Additional informationWages still owing at balance date $10,000

These are expenses which have already been incurred, but have not yet been paid for or recorded

Cr

At balance date (31 March), we have to adjust the Wages expense (add the outstanding wages of $10,000 to get the total wages for the year)

(+10,000)

Extract from Trial Balance as at 31 March

Accrued Expenses

Ch8B - Accrued & Prepaid expenses

4

DrWages 90,000

Additional informationWages still owing at balance date $10,000

These are expenses which have already been incurred, but have not yet been paid for or recorded

Cr

At balance date (31 March), we have to adjust the Wages expense (add the outstanding wages of $10,000 to get the total wages for the year)

(+10,000)

Extract from Trial Balance as at 31 March

Accrued Expenses

Ch8B - Accrued & Prepaid expenses

5

DrWages 90,000

Additional informationWages still owing at balance date $10,000

These are expenses which have already been incurred, but have not yet been paid for or recorded

Cr(+10,000)

The $10,000 is still in our Bank as we have not yet paid it, but does not belong to us as we owe it to the employees. It is therefore a liability to our business

Extract from Trial Balance as at 31 March

Accrued Expenses

Ch8B - Accrued & Prepaid expenses

6

DrWages 90,000

Additional informationWages still owing at balance date $10,000

These are expenses which have already been incurred, but have not yet been paid for or recorded

Cr(+10,000)

We now create a Current Liability called Accrued ExpensesLet’s do the General Journal

entry

(+10,000)

Accrued Expenses 10,000

Extract from Trial Balance as at 31 March

Accrued Expenses

Ch8B - Accrued & Prepaid expenses

7

DrWages 90,000

These are expenses which have already been incurred, but have not yet been paid for or recorded

Cr(+10,000)

(+10,000)

Accrued Expenses 10,000

General JournalDate

Account Titles

Ref no Debit Credit31/3 Wages expense 10,000

Accrued expenses (Wages) 10,000

Being entry required to accrue wages

Extract from Trial Balance as at 31 March

Let’s look at the financial statements

Ch8B - Accrued & Prepaid expenses

8

The Wages expense will be classified as an Admin Expense in the Income Statement

The Accrued expense will be classified as a Current Liability in the Balance Sheet

We will only be preparing an extract from each statement showing only the relevant items

Ch8B - Accrued & Prepaid expenses

9

Extract from the Income Statement for the year ended ……..

……….

Less ExpensesAdmin Expenses

Wages expense $90,000

Extract from the Balance Sheet as at …

……….

Current LiabilitiesAccrued expenses $10,00

0

(80,000 + 10,000)

Prepaid Expenses

Ch8B - Accrued & Prepaid expenses

10

These are expenses that have already been paid, but relate to the following period

DrRent 48,000

Additional informationHalf of the Rent amount is for the following year’s rent

Cr

Extract from Trial Balance as at 31 March

Prepaid Expenses

Ch8B - Accrued & Prepaid expenses

11

These are expenses that have already been paid, but relate to the following period

DrRent 48,000

Additional informationHalf of the Rent amount is for the following year’s rent

Cr

At balance date (31 March), we have to adjust the Rent expense (take out next year’s rent of $24,000)

(-24,000 )

Extract from Trial Balance as at 31 March

Prepaid Expenses

Ch8B - Accrued & Prepaid expenses

12

These are expenses that have already been paid, but relate to the following period

DrRent 24,000

Additional informationHalf of the Rent amount is for the following year’s rent

Cr(-24,000 )

Although we have already paid the $24,000, it was not yet due. If we had not paid it, it would have been in the Bank, which is a Current Asset.

Extract from Trial Balance as at 31 March

Prepaid Expenses

Ch8B - Accrued & Prepaid expenses

13

These are expenses that have already been paid, but relate to the following period

DrRent 24,000

Additional informationHalf of the Rent amount is for the following year’s rent

Cr(-24,000 )

We now create a Current Asset called Prepaid ExpensesLet’s do the General Journal

entry

(+24,000)Prepaid Expenses 24,000

Extract from Trial Balance as at 31 March

Prepaid Expenses

Ch8B - Accrued & Prepaid expenses

14

These are expenses that have already been paid, but relate to the following period

DrRent 24,000

Cr(-24,000 )

(+24,000)Prepaid Expenses 24,000

General JournalDate

Account Titles

Ref no Debit Credit31/3 Prepaid expenses (Rent) 24,000

Rent expense 24,000

Being entry to record prepayment of Rent

Extract from Trial Balance as at 31 March

Let’s look at the financial statements

Ch8B - Accrued & Prepaid expenses

15

The Rent Expense will be classified as an Admin Expense in the Income Statement

The Prepaid Expense will be classified as a Current Asset in the Balance Sheet

We will only be preparing an extract from each statement showing only the relevant items

Ch8B - Accrued & Prepaid expenses

16

Extract from the Income Statement for the year ended ……..

……….

Less ExpensesAdmin Expenses

Rent Expense $24,000

Extract from the Balance Sheet as at …

……….

Current AssetsPrepaid Expenses $24,00

0

(48,000 – 24,000)