Corporate 

Financial Reporting
Session 5: PGP 2018
Accounting Mechanics

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PROBLEM 4‐7A (b) Journalisation of November Transactions
Date Account Titles Debit Credit
Nov. 8 Salaries and Wages Payable  620
Salaries and Wages Expense  600
Cash  1,220
10 Cash  1,800
Accounts Receivable  1,800
12 Cash  3,700
Service Revenue  3,700
15 Equipment  3,600
Accounts Payable  3,600
17 Supplies  1,300
Accounts Payable  1,300
20 Accounts Payable  2,500
Cash  2,500
22 Rent Expense  480
Cash  480
25 Salaries and Wages Expense  1,000
Cash  1,000
27 Accounts Receivable  900
Service Revenue  900

29 Cash  750
Unearned Service Revenue  750
 Adjusting Entries
PROBLEM 4‐7A
Date Account Titles Debit Credit

1 Nov. 30 Supplies Expense 1,320

Supplies ($2,420 – $1,100) 1,320
2 30 Salaries and Wages Expense 480
Salaries and Wages Payable 480

3 30 Depreciation Expense 250
Accumulated Depreciation—Equipment 250

4 30 Unearned Service Revenue 500
Service Revenue 500

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REVISION Deferrals Accruals
Prepaid Expense Unearned Accrued Accrued
Revenue Expense Revenue
Examples Insurance, Rent Customer Interest,  Revenue earned 
deposits Salaries, Tax not collected
Cash exchange Assets  ... Dr. Cash ..… Dr.
(in advance) Cash … Cr. Liability … Cr.
Reason for  Prepaid  Unearned Expenses  Revenues 
Adjustment expenses  Revenue  incurred but not  earned but not 
recorded in  recorded in  yet paid in cash   yet received in 
asset have been  liability have  or recorded cash or recorded
used been earned
Adjustment  Expense   … Dr. Liability     … Dr. Expense … Dr. Asset… Dr.
Entry  Assets ….Cr. Revenue … Cr. Liability .Cr. Revenue … Cr.
Without Adjustment Entry:
Overstated Assets, Profit,  Liability Profit, Equity
Equity
Understated Expenses Revenue, Profit,  Expenses,  Revenue, Assets,
Equity Liability Profit, Equity
Cash exchange   Liability     … Dr. Cash .… Dr.
(later) Cash        … Cr. Asset … Cr.
REVISION Deferrals Accruals
Prepaid Expense Unearned Accrued Accrued
Revenue Expense Revenue
Examples Insurance, Rent Customer Interest,  Revenue earned 
deposits Salaries, Tax not collected
Cash exchange Assets  ... Dr. Cash ..… Dr.
(in advance) Cash … Cr. Liability … Cr.
Reason for  Prepaid  Unearned Expenses  Revenues 
Adjustment expenses  Revenue  incurred but not  earned but not 
recorded in  recorded in  yet paid in cash   yet received in 
asset have been  liability have  or recorded cash or recorded
used been earned
Adjustment  Expense   … Dr. Liability     … Dr. Expense … Dr. Asset… Dr.
Entry  Assets ….Cr. Revenue … Cr. Liability .Cr. Revenue … Cr.
Without Adjustment Entry:
Overstated Assets, Profit,  Liability Profit, Equity
Equity
Understated Expenses Revenue, Profit,  Expenses,  Revenue, Assets,
Equity Liability Profit, Equity
Cash exchange   Liability     … Dr. Cash .… Dr.
(later) Cash        … Cr. Asset … Cr.
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For each of the following oversights, state whether total assets will be understated,
overstated, or not affected.

______ a. Failure to record revenue earned but not yet received Understated

Overstated
______ b. Failure to record expired rent

______ c. Failure to record accrued interest income at the bank Understated

______ d. Failure to record depreciation Overstated

______ e. Failure to record accrued wages Not affected

Not affected
______ f. Failure to convert unearned revenue to earned revenue

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Indicate with an X in the appropriate column the type of entry to be made to close the
following accounts:

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 Determining Cash Flows: Applying the General Rule
General Rule Potential cash payments or receipts Note: The general 
– Amount not paid or received rule does not apply 
Cash flows for expenses or from revenues to depreciation

Application of the general rule varies with the type of asset or liability account
• For deferrals
– Prepaid expenses
• Ending Balance + Expense for the Period – Beginning Balance
– Unearned revenues
• Ending Balance + Revenue for the Period – Beginning Balance
• For accruals
– Accrued expenses
• Beginning Balance + Expense for the Period – Ending Balance
– Accrued revenues
• Beginning Balance + Revenue for the Period – Ending Balance

Cash Receipts  Revenue (or  + Increase in  ‐ Increase  in 

(Payments) for  Expense) for  Deferral (Prepaid/  Accrual (Receivables 
Revenue (Expense) = the period  Unearned) / Payables)
 Cash Payments for Insurance
Cash Prepaid Insurance Insurance Expense
310 May 31 480 120 120
310

Jun 30 670

General Rule:
End. balance + Expense for period – Beg.Bal. = Cash payments

Prepaid Insurance at June 30 $670

Insurance Expense during June 120
Potential cash payments for insurance 790
Less Prepaid Insurance at May 31 480
Cash payments for insurance during June $310
The beginning balance is deducted
because it was paid in a prior period
Why does the cash paid for expenses in an accounting period often differ from the amount of expenses 
on the income statement?
The amounts for expenses on the income statement are derived from accrual based accounting, including 
adjustments. These amounts are not necessarily amounts that were actually paid out during the period. 
The following amounts are taken from the balance sheets of Milman Corporation:

During 20x8, expenses related to prepaid expenses were $103,000, and expenses related to
accrued liabilities were $197,000. Determine the amount of cash payments related to prepaid
expenses and to accrued liabilities for 20x8.

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The following amounts are taken from the balance sheets of Milman Corporation:

During 20x8, expenses related to prepaid expenses were $103,000, and expenses related to
accrued liabilities were $197,000. Determine the amount of cash payments related to prepaid
expenses and to accrued liabilities for 20x8.

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Cash Receipts  Revenue (or  + Increase in  ‐ Increase  in 
(Payments) for  Expense) for  Deferral (Prepaid/  Accrual (Receivables 
Revenue (Expense) = the period  Unearned) / Payables)

Revenue (or  Cash Receipts  ‐ Increase in  + Increase  in Accrual 

Expense) for the  (Payments) for  Deferral (Prepaid/  (Receivables / 
period               = Revenue (Expense) Unearned) Payables)

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 2001 2000 Increase (decrease)
Revenue ‐ Deferral 
Unearned fee revenue 1600 1100 500
Revenue ‐Accrual
Accounts Receivable 1800 2100 ‐300
Interest receivable 680 570 110
Expense‐ Deferral 
Prepaid rent 7900 5900 2000
Expense ‐ Accrual
Salaries payable 850 1200 ‐350
Interest payable 810 730 80
Revenue or 
Expense for the  Cash Receipts (Payments) for 
period  =  Revenue (Expense) =  Answer

Fee Received
Fee Revenue 21710

Interest Received
Interest Revenue 2030

Rent Paid
Rent Expense 11600

Salaries Paid
Salaries expense 6820
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Interest Paid
Interest Expense 1840
 2001 2000 Increase (decrease)
Revenue ‐ Deferral 
Unearned fee revenue 1600 1100 500
Revenue ‐Accrual
Accounts Receivable 1800 2100 ‐300
Interest receivable 680 570 110
Expense‐ Deferral 
Prepaid rent 7900 5900 2000
Expense ‐ Accrual
Salaries payable 850 1200 ‐350
Interest payable 810 730 80
Revenue or 
Expense for the  Cash Receipts (Payments) for  ‐ Increase in Deferral  + Increase  in Accrual (Receivables 
period  =  Revenue (Expense) (Prepaid/ Unearned) / Payables) =  Answer
‐ Increase  in Unearned 
Fee Received Revenue ‐ Decrease in Accounts receivable
Fee Revenue 21710 ‐ 500 ‐300 20,910

Interest Received + Increase in Interest receivable
Interest Revenue 2030 110 2,140

Rent Paid ‐ Increase  in Prepaid rent

Rent Expense 11600 ‐ 2000 9,600

Salaries Paid ‐ Decrease in Salaries payable
Salaries expense 6820 ‐350 6,470
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Interest Paid +increase in Interest payable
Interest Expense 1840 + 80 1,920
Thank You

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