Example: Prepaid rent

ABC company rent office for 10mil/month

1-Jan Paid in advance for 120mil for 12 months from Jan to Dec
Prepaid rent 120
Cash 120

Cash Prepaid rent

1 Jan 120 Jan 1 $120

Bal 0

Rent expense
31 Jan $10
28 Feb 10
...
31 Dec 10
Bal 120

ACCRUAL VS CASH BASIS ACCOUNTING

Illustration: Suppose that Fresh Colors paints a large building in 2016. In 2016, it incurs and pays
total expenses (salaries and paint costs) of $50,000. It bills the customer $80,000, but does not
receive payment until 2017.
 Accrual basis accounting:
2016 2017 occur => recognise th
Accrual basis Revenue 80000 Revenue 0 transactions
Expense 50000 Expense 0 In accordance with IFRS
Cash basis accounting: ca
Net income 30000 Net income 0 exchanged => recognise
Cash basis Revenue 0 Revenue 80000 transactions
Expense 50000 Expense 0
Net income -50000 Net income 80000 Not in accordance with IFRS

REVENUE AND EXPENSE RECORGNITION PRINCIPLE

ADJUSTING ENTRIES
1. The basic of adjusting entries
Why? Recorgnise revenue and expenses accurately in time
When? they are required everytime when company prepare FS
How? Adjust 1 account in the IS and 1 account in the SOFP
2. Types of adjusting entries

PREPAID EXPENSE (asset)

Cash payment before expense recorded

i.e. Prepaid rent, prepaid insurance; supplies; tuition fee, equipment and building
UNEARNED REVENUE (liability)
Cash received before recorded
i.e. Flight ticket, customer deposits, annual subscription,...

ACCRUED REVENUE (revenue)

revenues recorded before cash received
i.e. Rent (if we are the landlord and customer pay after a year), interest, se
ACCRUED EXPENSE (expense)
Expense recorded before cash payment.
i.e. Mobile phone bill, electricity bill, water bill, interest, salaries,...

2.1. Chi phí trả trước

a. Chi phí trả trước (tiền thuê nhà)
Assume: On October 4, Yazici Advertising paid 600 for a one-year fire insurance policy. Coverage began on October 1. Yazici
recorded the payment by increasing (debiting) Prepaid Insurance.

4-Oct Prepaid insurance $600 Cash

Cash $600 4-Oct 600

Adjusting
31-Oct Insurance expense 50 Prepaid insurance
 Prepaid insurance 50 4-Oct 600 Oct 4. Adj 50

Bal 550

Insurance expense
Oct 4. Adj 50

Bal 50

b. Chi phí công cụ, dụng cụ

Assume: Yazici Advertising purchased supplies costing 2,500 on October 5. Yazici recorded the purchase by increasing (debiting)
the asset Supplies. This account shows a balance of 2,500 in the October 31 trial balance. An inventory count at the close of
business on October 31 reveals that 1,000 of supplies are still on hand.
5-Oct Supplies 2500
Cash 2500 Cash
5-Oct 2500
Adjusting
31-Oct Supplies expense 1500
Supplies 1500 Supplies
5-Oct 2500 Oct 31. Adj $1,500

Bal $1,000

Supplies expenses
Oct 31. Adj 1500

Bal 1500
c. Chi phí khấu hao TSCĐ

On Oct 1, Yazici bought an equipment of $5000, assume that depreciation on the equipment is $480 per year, or $40 per month
1-Oct Equipment 5000 Cash
 Cash 5000 1-Oct 8-Sep
Adjusting
31-Oct Depreciation expense 40
Accumulated depreciation 40 Equipment
1-Oct 5000
Accumulated depreciation is a contra account of equipment,
building,... Bal 5000

Depreciation expense
31-Oct 40

Bal 40

Accumulated depreciation
Oct 31. Adj. 40

Bal 40
In the SOFP (Oct 31) Pioneer
Equipment 5000
Less: Accumulated depreciation -40
4960
2.2 Doanh thu chưa thực hiện
Yazici received $1200 on Oct 2 from R. Knox for advertising services expected to be completed by Dec 31. Analysis reveals that the
company performed $400 of service in October.
2-Oct Cash 1200 Cash
Unearned service revenue 1200 2-Oct 1200

Adjusting
31-Oct Unearned service revenue 400 Unearned service revenue
Service revenue 400 Oct 31. Adj 400 2-Oct 1200

REASON Revenue is understated Bal 800

 Liability is overstated
Service revenue
RULE Debit liability Oct 31. Adj 400
Credit revenue
Bal 400

2.3. Doanh thu, thu nhập dồn tích

On October, Yazici Advertising Agency performed services worth $200 that were not billed to client in October
Adjusting entry
Account receivable 200 Account receivable
Service revenue 200 31-Oct 200

REASON Assets understated

Revenue understated
Service revenue
RULE Debit assets 31-Oct 200
Credit revenue

2.4. Chi phí dồn tích (phải trả)

a. Interest
Yazici signed a three-month note payable in the amount of $5000 on Oct 1. The note requires Yazici to pay interest at an annual
rate of 12%.
Adjusting
31-Oct Interest expense 50 Interest expense
Interest payable 50 31 Oct. Adj. 50

REASON Expense understated Bal 50

Liabilities understated
Interest payable
RULE DEBIT EXPENSE 31 Oct. Adj. 50
 CREDIT LIABILITY
Bal 50

b. Salaries & wages

Yazici paid salaries and wages on Oct 26; the next payment of salaries will not occur until Nov 9. the employees receive total
salaries of $2000 forr a five - day work week, or $400 per day. Thus, accrued salaries at Oct 31 are $1200 ($400 x 3 days)

Adjusting
31-Oct Salaries & Wages expense 1200 S&W expense
Salaries & Wages payable 1200 Oct 31. Adj 1200

Bal 1200

S&W payable
Oct 31. Adj. 1200
Bal 1200
Prepaid rent
31 Jan 10
28 Feb 10
...
31 Dec 10

Rent expense
Accrual basis accounting: events
occur => recognise the
transactions
Cash basis accounting: cash is
exchanged => recognise the
transactions
tion fee, equipment and building,...

ubscription,...

pay after a year), interest, service performed

, interest, salaries,...
REASON Assets overstated
Expenses understated

RULE Debit expense

Credit asset
Pioneer Oracle
10000
5040
4960
 1. unearned revenu
2. Accrued expens
3. Accrued expens
4. Accrued revenue
5. Prepaid expense
6. Unearned reven
7. Accrued revenue
8. Prepaid expense
9. Prepaid expense
10. Prepaid expens
11. Accrued expen

1 Interest expense
Interest payable

2 Supplies expense
Supplies

3 Depreciation expens
 Accumulated depre

4 Insurance expense
Prepaid insurance

5 Unearned revenue
Service revenue

6 Account receivable
Service revenue

7 S&W expense
S&W payable
 unearned revenue
Accrued expense
Accrued expense
Accrued revenue
Prepaid expense
Unearned revenue
Accrued revenue
Prepaid expense
Prepaid expense
0. Prepaid expense
1. Accrued expense

300
terest payable 300

1550
1550

1000
ccumulated depreciation 1000

1225
repaid insurance 1225

8000
ervice revenue 8000

4200
ervice revenue 4200

5400
&W payable 5400
 Adjusting entries
On May 31
1 Insurance expense

2 Supplies expense

3 Depreciation expense

4 Interest expense

5 Unearned rent revenu

1
6 S&W expense
P3.1
justing entries Ledger
On May 31 Insurance expense
Insurance expense 200 May 31. Adj 200
Prepaid insurance 200
Bal 200
Supplies expense 1,330
Supplies 1,330 Supplies
44,712 2,080
Depreciation expense 425
Accumulated depreciation - building 300 Bal 750
Accumulated depreciation - equipment 125
Depreciation expense
Interest expense 200 (40000*6%/12) May 31. Adj 425
Interest payable 200
Bal 425
Unearned rent revenue 2,200
Rent Revenue 2,200

S&W expense 750

S&W payable 750
 Interest expense
May 31. Adj 200

Bal 200

Unearned rent revenue

May 31. Adj 2,200

S&W expense
44,712 3,300
May 31. Adj 750
Bal 4,050
nsurance expense Prepaid insurance
May. 31 2,400 May 31. Adj 200

Bal 2,200

Supplies Supplies expense

May 31. Adj 1,330 May 31. Adj 1,330

Bal 1,330

preciation expense Accumulated depreciation - building

May 31. Adj 300

Bal 300

Accumulated depreciation - equipment

May 31. Adj 125

Bal 125
nterest expense Interest payable
May 31. Adj 200

Bal 200

arned rent revenue Rent Revenue

44,712 3,300 44,712 10,300
May 31. Adj 2,200
Bal 1,100 Bal 12,500

S&W expense S&W payable

May 31. Adj 750

Bal 750
Assets, liabilities, SE, dividends, revenue, expense

Lazy river resort Laz

Adjusted trial balance Inco
May 31, 2020 For the mont
Debit Credit Revenues
Cash 3,400
Supplies 750 Expenses
Prepaid insurance 2,200
Land 12,000
Building 60,000
Accumulated depreciation - building 300
Equipment 14,000
Accumulated depreciation - equipment 125
Account Payable 4,700
Unearned Rent revenue 1,100
Mortgate payable 40,000 Net Income
Interest payable 200
S&W payable 750
Share capital - ordinary 41,380 Laz
Dividends 1,000 Statement
Rent revenue 12,500 For the Mont
Advertising expense 600 Retained earnings, May 1
S&W expense 4,050 Add: Net income
Utility expense 900 Less: Dividends
Insurance expense 200 Retained earnings, May 31
Supplies 1,330
Depreciation expense 425
Interest expense 200
101,055 101,055
 Lazy river resort
Income statement
For the month ended May 31, 2020
Revenues
Rent revenue 12,500
Expenses
Advertising expense 600
S&W expense 4,050
Utility expense 900
Insurance expense 200
Supplies 1,330
Depreciation expense 425
Interest expense 200
7,705
Net Income 4,795

Lazy river resort

Statement of retained earnings
 For the Month Ended May 31, 2020
Retained earnings, May 1 -
Add: Net income 4,795
Less: Dividends 1,000
Retained earnings, May 31 3,795
 Lazy river resort
Statement of Financial Position
May 31, 2020
Assets
Land 12,000
Buildings 60,000
Accumulated depreciation - building - 300 59,700
Equipment 14,000
Accumulated depreciation - equipment - 125 13,875
Supplies 750
Cash 3,400
Prepaid insurance 2,200
Total assets 91,925

Equity & Liabilities

Equity
Share capital - ordinary 41,380
Retained earnings, May 31 3,795 45,175
Liabilities
Account Payable 4,700
Unearned Rent revenue 1,100
Mortgate payable 40,000
Interest payable 200
S&W payable 750
Total liabilities 46,750
91,925
 Analyze
business Journalize
transactions
GENERAL JOURNAL

Date Account Debit Credit

Nov 8 S&W expense $1,000
S&W payable $700
Cash $1,700
10 Cash $3,620
Account receivable $3,620
12 Cash $3,100
Service revenue $3,100
15 Equipment $2,000
Account payable $2,000
17 Supplies $700
Account payable $700
20 Account Payable $2,700
Cash $2,700
22 Rent expense $400
Cash $400
25 S&W expense $1,700
Cash $1,700
27 Account receivable $2,200
Service revenue $2,200
29 Cash $600
Unearned service revenue $600
 Post

Assets, liability, equity, dividend, revenue, expense

Cash Salaríes & Wages payable

1-Nov $2,400 Nov 8 1,700 8-Nov $700 Nov 1 700
10-Nov 3,620 Nov 20 2,700 Nov 30. A 350
12-Nov 3,100 Nov 22 400 Bal $ 350
29-Nov 600 Nov 25 1700

Bal $ 3,220
Share capital ordinary
Account receivable Nov 1 11,000
1-Nov $4,250 Nov 10 3,620
27-Nov 2,200 Bal $ 11,000

Bal 2,830
Retained earnings
Supplies Nov 1 2,950
1-Nov $1,800 Nov 30. 1,100
17-Nov 700 Bal $ 2,950

Bal 1,400
Service revenue
Equipment Nov 12 3,100
1-Nov $12,000 Nov 27 2,200 Adju
15-Nov 2,000 Nov 30. $ 1,220 ent
Bal 6520
Bal 14,000
Acccumulated depreciation - Equipment Rent expense
Nov 1 2,000 22-Nov $400
Nov 30. 200
Bal $ 2,200 Bal $ 400

Account payable S&W expense

20-Nov $2,700 Nov 1 2,600 8-Nov $1,000
Nov 15 2,000 25-Nov 1,700
Nov 17 700 Nov 30. $350
Bal $ 2,600 Bal $3,050
Unearned Service revenue Supply expense
Nov 30. Adj $1,220 Nov 1 1,200 Nov 30. $1,100
Nov 29 600
Bal $ 580 Bal $ 1,100

Depreciation expense
Nov 30. $200
Bal $ 200
 Trial Adjusted Trial
Balance Balance
Beck Equipment Repair
Trial balance
November 30, 2020
Before adjustment After adjustment
Dr Cr Dr Cr
Cash $ 3,220 $ 3,220
Account receivable $ 2,830 2,830
Supplies $ 2,500 1,400
Equipment $ 14,000 14,000
Acccumulated depreciation - Equipment$ 2,000 $ 2,200
Account payable $ 2,600 $ 2,600
Unearned Service revenue $ 1,800 580
Salaríes & Wages payable $ - 350
Share capital ordinary $ 11,000 11000
Retained earnings $ 2,950 2950
Service revenue $ 5,300 6520
Rent expense $ 400 400
S&W expense $ 2,700 3050
Supply expense $0 1100
Depreciation expense $ - 200

$ 25,650 $ 25,650 $ 26,200 $ 26,200

Adjusting
entries

On Nov 30
1 Supply expense 1100
Supplies 1100

2 S&W expense 350

S&W payable 350

3 Depreciation expense 200

Accumulated depreciation 200

4 Unearned service revenue 1220

Service revenue 1220
 Trial Balance
Account titles Dr
Cash 3220
Account receivable 2830
Supplies 2500
Equipment 14000
Acccumulated depreciation - Equipme
Account payable
Unearned Service revenue
Salaríes & Wages payable
Share capital ordinary
Retained earnings
Service revenue
Rent expense 400
S&W expense 2700
Supply expense
Depreciation expense
25650
FS
 Beck Equipment Repair
Worksheet
For the Monthe ended Nov 30, 2020

Trial Balance Adjustment Adjusted Trial balance Income statement SOFP

Cr Dr Cr Dr Cr Dr Cr Dr
3220
2830
1100 1400
14000
2000 200 2200
2600 2600
1800 1220 580
0 350 350
11000 11000
2950 2950
5300 1220 6520 6520
400 400
350 3050 3050
1100 1100 1100
200 200 200
25650 2870 2870 26200 26200 4750 6520
Net income => 1770
6520 6520
SOFP
Cr