Accounting TOPIC 10 - Balance Day Adjustments

Accounting
Teach Yourself Series

Topic 10: Balance Day Adjustments
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© TSSM 2013 Page 1 of 33

Contents
Balance Day Adjustments .................................................................................................................................. 3

Initial terminology .......................................................................................................................................... 3
As it appears in Units 2 - 4 ......................................................................................................................... 3
Review Questions .................................................................................................................................. 4
Depreciation ................................................................................................................................................... 5
As it appears in Units 2 - 4 ......................................................................................................................... 5
As it appears in Unit 4 ................................................................................................................................ 7
Review Questions .................................................................................................................................. 9
Bad Debts ..................................................................................................................................................... 11
As it appears in Units 3 - 4 ....................................................................................................................... 11
Review Questions ................................................................................................................................ 12
Stock Loss .................................................................................................................................................... 13
Prepaid Expenses .......................................................................................................................................... 15
As it appears in Units 2 & 3 ..................................................................................................................... 15
Accrued Expenses ........................................................................................................................................ 17
As it appears in Units 2 & 3 ..................................................................................................................... 17
Stock Write Down ........................................................................................................................................ 19
As it appears in Unit 4 .............................................................................................................................. 19
Stock Gain .................................................................................................................................................... 22
Prepaid Sales Revenue ................................................................................................................................. 24
Other Prepaid Revenue ................................................................................................................................. 26
Accrued Revenue ..................................................................................................................................... 28
Solutions to Review Questions ........................................................................................................ 30

Balance Day Adjustments
Accounting financial reports are required to determine the performance of a business over a reporting period.
The Qualitative Characteristics of Relevance, Reliability and Comparability require that the financial reports
are accurate, based on reliable, unbiased information and apply the same accounting methods as previous
periods so comparisons can be made.
In order to prepare financial reports that are accurate and provide more useful information for decision-
making, some accounts require adjustments so the information presented is accurate and reflective of
performance for that reporting period.
Initial terminology
As it appears in Units 2 - 4
At the end of the reporting period, prior to the preparation of reports, it is important that the records are
accurate and that the financial reports are accurate. This is particularly the case for the profit figure reported
and the financial position of the business as reflected in the Balance Sheet.
Consequently, to make the information in the reports more relevant for decision-making, some adjustments
to existing accounts must occur.
The preparation of adjustments support the Accounting principles of reporting Period and Going Concern –
the life of the business is assumed to be continuous and so is broken up into equal periods of time to allow
the preparation of reports (Going Concern). These reports must match the revenue earned in a period with
the expenses incurred in a period to determine the profit for that period (Reporting Period).
Balance day adjustments can be grouped into two broad categories:
 Expense adjustments
 Revenue adjustments
Expense adjustments involve transactions for:
 Depreciation
 Bad Debts
 Stock Loss
 Prepaid Expenses
 Accrued Expenses
 Stock Write Down
Revenue adjustments involve transactions for:
 Stock Gain
 Prepaid Sales Revenue
 Other Prepaid Revenue
 Accrued Revenue

Review Questions
1. Explain with reference to a Qualitative Characteristic why balance day adjustments are required.
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Depreciation
Depreciation is the allocation of the cost of an asset over its useful life. The calculation and recording and
reporting of depreciation requires understanding of a number of key terms:
 Historical cost – the original purchase price of an asset plus any one-off costs associated with getting
the asset into a position and condition for use by the business.
 Useful life – the length of time the business will keep an asset and that asset will provide an inflow of
economic benefit to the business. This time period may not be the same as how the asset will last.
Some businesses may have a policy of replacing Motor Vehicles every five years while we know a
Motor Vehicle will last for longer than that.
 Residual value – the amount the business expects to receive for the asset when it is sold or traded-in
at the end of its useful life.
 Depreciable value – the total amount to be depreciated over the useful life of the asset. Found by
deducting Residual Value from Historical Cost.
 Depreciation expense – the part of the value of the asset that is consumed each reporting period.
 Accumulated depreciation – the total amount of depreciation charged against an asset at that point in
time.
 Carrying value – the unallocated cost of an asset plus the residual value at a point in time. Found by
deducting accumulated depreciation from historical cost.
Depreciation is charged at a fixed percentage (called the straight-line method) on the Historical Cost of an
asset.

Example:
The business purchased a photocopier on 31 March 2013. It had an Invoice price of $10,000 plus $1,000
GST. The business paid $1,000 (plus $100 GST) to have the photocopier installed.
Insurance on the Asset is $20 per month (plus $2 GST per month). The Asset has a life of 8 years but the
business has a policy of replacing Assets every 5 years. It is expected that the business will sell the Asset for
$2,000 at the end of its useful Life.
Key points:
 Historical Cost - $10 000 + $ 1 000 = $11 000

◦ Annual insurance is an ongoing expense
◦ GST is not included in the historical cost
 Estimated Life – 5 or 8 years?

◦ Business plans to only keep it for 5
 Scrap Value - $2 000
 Thus 11 000 – 2 000 /5 = $ 1 800 per annum
 Depreciation on Photocopier per month = $1 800 / 12 = $150
Assume balance day is 30 June 2013:

Date Particulars General Ledger Subsidiary Ledger
2013 Debit Credit Debit Credit
Jun 30 Depreciation - Photocopier 450
Accumulated
Depreciation -
Photocopier 450
Balance Sheet Extract 2013
Non Current Assets

Photocopier 10 000 (1)
Less Accumulated Depreciation 500 (2) 9 500 (3)
1. The Historical Cost of the NCA – the original purchase price plus all once off costs associated with
getting the asset ready for use
2. Accumulated Depreciation – the total amount of depreciation that has been allocated as an expense
against revenue to date
3. Carrying Value – that part of the asset that has yet to be depreciated that is yet to be matched against
revenue as an expense + the residual value

As it appears in Unit 4
In Unit 4 students are still required to calculate and record and report Depreciation. However, a second
method of calculating depreciation is introduced and students must understand why this method may be
used, which assets are generally depreciated using this method and the effect on profit of using one method
compared to the other. This second method is called the Reducing Balance method.
The Reducing Balance method of depreciation allocates more of the cost of an asset in the early years of the
asset’s life compared to the later years as it assumes that the asset is more productive in the early years. An
example might be a Motor Vehicle which becomes a ‘used’ or ‘second-hand’ car once it has been driven. It
is also more reliable and more efficient when it is newer. As the asset becomes older it doesn’t work as well
and therefore does not earn as much revenue. Depreciation is charged to match this pattern of use.
Journal and ledger entries for this method of depreciation are no different to the recording or reporting using
the straight-line method. The difference is the basis for calculation.
In straight-line depreciation we charge a fixed % of the cost of the asset. In reducing balance we charge a
fixed % of the reduced balance. The reduced balance is Historical Cost – Accumulated Depreciation. An
example is:
The business purchases a Motor Vehicle for $36,000. It is expected to have a useful life of 8 years and a
residual value of $6,000. Depreciation is to be charged at 20% per annum on the reducing balance method.
The table below shows the calculation of depreciation for the life of the asset:
Depreciation Accumulated
Year Reduced Balance Expense Depreciation
1 36000 7200 7200
2 28800 5760 12960
3 23040 4608 17568
4 18432 3686 21254
5 14746 2949 24204
6 11796 2359 26563
7 9437 1887 28450
8 7550 1510 29960
In Year 1 depreciation is charged at 20% on $36,000 – as no depreciation has been charged as yet, this is
seen as the ‘reduced balance’. The depreciation expense calculated as 36,000 x 20% = $7,200. This is
deducted from the Historical Cost to determine the ‘reduced balance’ of $28,800.
In Year 2, depreciation is calculated as $28,800 x 20%. This shows depreciation as $5,760 and a Carrying
Value of $23,040.
This calculation continues until the end of Year 8 where depreciation expense is $1,510 and the Carrying
Value at the end of Year 8 is $6,040 and Accumulated Depreciation is $29,960.
The difference between this method and the Straight-line method is that depreciation charged is different
each period. The result over the life of the asset should be similar. The following example using the
information above demonstrates this (Straight-line method charges depreciation at $3,750 per annum):

Reducing Balance Straight Line
Reduced Depreciation Accumulated Historical Depreciation Accumulated

Year Balance Expense Depreciation Cost Expense Depreciation
1 36000 7200 7200 36000 3750 3750
2 28800 5760 12960 36000 3750 7500
3 23040 4608 17568 36000 3750 11250
4 18432 3686 21254 36000 3750 15000
5 14746 2949 24204 36000 3750 18750
6 11796 2359 26563 36000 3750 22500
7 9437 1887 28450 36000 3750 26250
8 7550 1510 29960 36000 3750 30000
In both cases, the Carrying Value at the end of the Useful Life is approximately $6,000 (Reducing Balance is
slightly less accurate).
Over the life of the asset the depreciation charged is similar – it is just that the reducing balance method
charges a different amount each period in an effort to better match allocation of cost to revenue earned.
The effect on profit of using the different methods is:

 Reducing balance charges more depreciation than straight-line in the early years so profit will be
lower
 Reducing balance charges less depreciation than straight-line in the later years so profit will be
higher
 Over the life of the asset the amount of depreciation charged is similar – so the overall effect on
profit is negligible.

Review Questions
2. On 1 February 2013 the business purchased a new Delivery Vehicle. Details of the purchase were:
Cost $42 000

Delivery charge $1 000
Modifications (shelving & signage) $2 000
Annual Registration $1 200
GST $4 620
The Delivery Vehicle has an expected life of 10 years but the business plans to keep it for 6 years at
which time they will sell the asset for an expected $9 000.
Calculate the Depreciation Expense to be charged on 31 December 2013.
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3. Provide definitions for the following terms:
i. Residual value
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ii. Accumulated depreciation
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4. On 31 December 2013 the business charged depreciation on Equipment of $2,500. Show the General
Journal entry necessary to record this.


5. The following information relates to a Truck purchased by the business:
 Historical Cost - $54,000
 Useful Life – 8 years
 Residual Value - $14,000
 Depreciation charged at: $5,000 p.a using the Straight-line method or 17% using the Reducing
Balance method
Complete the table below calculating depreciation on the Truck using both methods

1
2
3
4
5
6
7
8
6. Using the information in the table above, state the effect on profit (and the $ amount of the effect) in
Year 3 of using the Reducing Balance method of depreciation rather than the Straight-line method.
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Bad Debts
A Bad Debt occurs when a Debtor is unable to pay their debt.
There are two scenarios:
1. Debtor can’t pay any of the amount owed

2. Debtor pays a % of what is owing and the balance is written off
Bad Debts is an expense as it is a reduction in inflows in the form of a decrease in Assets that decreases
Owner’s Equity and is not Drawings.
A Bad Debt can occur at any time during the reporting period and is recorded when known.
Example 1
On 5 May 2013 H. Simpson is informed by a solicitor for B. Gumble that Gumble has been declared
bankrupt and is unable to pay the $300 owed to Simpson. This information is recorded in the General
Journal [Memo 5].

May-05 Bad Debts 300
Debtors Control 300
Debtor - Gumble 300
Debt written off as irrecoverable [Memo 5]
Example2
On 5 May 2013 H. Simpson received a letter from a solicitor for B. Gumble that Gumble has been declared
bankrupt and is only able to pay $0.20 in the dollar of the $300 owed to Simpson. A cheque accompanied the
letter [Rec. 43] and this information must be recorded in the appropriate journals [Memo 5].

May-05 Bad Debts 240
Debtors Control 240
Debtor - Gumble 240
Date Details Rec Bank Disc Debtors Cost Selling Sundries GST
2013 No. Exp. Control of Sales Price
May-05 Debtor - Gumble 43 60 60

Review Questions
7. On 4 March 2013 a Debtor - H. Green was declared bankrupt. His $700 debts were to be written off.
Prepare the General Journal entry necessary to record this information.

8. Explain why Bad Debts is considered an expense.
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Stock Loss
At the end of a reporting period, the information that is shown in the Stock Cards is checked for accuracy of
recording. This is done using a physical stocktake whereby the actual amount of stock on hand is physically
counted. The result is then compared with the figure shown in the Stock Card.
In some circumstances the physical count reveals an amount less than what is shown in the Stock Card. This
is known as a Stock Loss. It can occur due to:
 Theft of stock
 An undersupply of stock from the supplier
 An oversupply of stock to a customer
 A recording error
 An error on the original Invoice
A Stock Loss is an Expense and will be reported as such in the Income Statement.
Example
At the end of the reporting period a Stock Card revealed the following:
Date Details IN OUT BALANCE
Unit Total Unit Total Total
Qty Cost Cost Qty Cost Cost Qty Unit Cost Cost
29/06/2013 Rec 45 3 50 150 20 50 1 000
A physical stocktake revealed that there were 19 units on hand.
Hence there is a Stock Loss of 1 unit. This is recorded in the General Journal, the Stock Card, the ledger
accounts and reported in the Income Statement.

Jun 30 Stock Loss 50
Stock Control 50

29/06/2013 Rec 45 3 50 150 20 50 1 000
30/6/2013 Memo 3 1 50 50 19 50 950

Extract from INCOME STATEMENT FOR YEAR ENDING 30 June 2013
Revenue $ $
Sales 6 900
Less Cost of Sales 3 500
Gross Profit 3 400
Less Stock Loss 50
Adjusted Gross Profit 3 350
Review Questions
9. Explain what is meant by an undersupply by supplier.
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10. Prepare the General Journal entry necessary to record a Stock Loss of $500


Prepaid Expenses
As it appears in Units 2 & 3
A Prepaid Expense is an expense paid in advance. The adjustment required is to determine the amount of the
Prepaid Expense used during the current reporting period and the amount yet to be used – which will be used
in the next reporting period.
In recording the information for this type of transaction there will be two tasks:
 Recording the payment of the prepaid expense

 The adjusting entry required on balance day
Example
On 1 March 2013 the business paid $1,200 (+ $120 GST) for the business Insurance policy for the coming
year.
The entry in the Cash Payments Journal would be:
Cash Payments Journal

Date Chq. Disc. Creditors Stock
2013 Details No. Bank Rev Control Control * * Sundries GST
Prepaid Insurance
Mar 1 Expense 1 320 1 200 120
At 30 June 2013 an adjustment is required to determine the amount of Insurance used or ‘expensed’. 4
months have been used at $100 per month. Therefore $400 is the Insurance Expense for the period. The
following General Journal entry is required:

Jun 30 Insurance Expense 400
Prepaid Insurance
Expense 400
The Prepaid Insurance Expense account would appear as:
Prepaid Insurance Expense

Date Cross-reference Amount Date Cross-reference Amount
2013 2013
Jun 30 Bank 1 200 Jun 30 Insurance Expense 400
The balance of the Prepaid Insurance Expense account will be reported as a Current Asset in the Balance
Sheet and the Insurance Expense will be reported as an Expense in the Income Statement.

Review Questions
11. Explain why Prepaid Rent Expense is classified as a Current Asset in the Balance Sheet.
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12. The following information is available for Prepaid Advertising Expense:
Balance of account at 1 July 2013 - $4,800
Paid 12 months Advertising in advance on 1 November 2013 - $18,000 + $1,800 GST
Calculate the Advertising Expense for the 12 months ended 30 June 2013
13. Using the information above, prepare the General Journal entry necessary on 30 June 2013.


Accrued Expenses
As it appears in Units 2 & 3
Accrued Expenses are the ‘opposite’ of Prepaid Expenses – in this case the expense has been incurred but
not yet paid.
This requires two tasks to be completed.
 Recording the expense incurred

 Recording the payment of the expense in a future reporting period.
This type of adjustment usually relates to Wages expense where employees are paid periodically (fortnightly
or monthly) after they have completed the work.
At times, the end of the reporting period and the day upon Wages are paid do not coincide. In this situation
the business must determine how much Wages are owing for this reporting period as the work has been done
this period and hence the expense incurred.
Example
At 31 December 2013, the business owes $800 in wages to employees for work completed during the month.
The next payment of wages is due on 10 January 2013.
The two-fold effect of this transaction is:
 Wages will increase as the amount of the expense incurred has increased
 A Liability has been created because the business has incurred an obligation (have a debt they must pay in
the next reporting period.
The recording of this adjustment occurs in the General Journal.

Dec 31 Wages 800
Accrued Wages 800
On 10 January 2013 the business will make its next payment for Wages. This payment will include the
payment of the Liability – Accrued Wages.
Using the example above, the business made its next Wages payment on 10 January 2013 of $4,800
[Chq 23].
Cash Payments Journal

Date Chq. Disc. Creditors Stock
2013 Details No. Bank Rev Control Control * Wages Sundries GST
Jan 10 Wages 23 4 800 4 000
Accrued Wages 800
The payment is separated to reflect that two different accounts are being debited.
Review Questions
14. Explain why Accrued Wages is reported as a Current Liability
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15. On 31 December 2013 Wages were owing to employees. There are 3 employees who are paid $100 a day
each and there are 4 days Wages owing. Prepare the General Journal entry required.


Stock Write Down
The Historical Cost principle states that ‘all transactions are recorded at their original value. Therefore,
items are shown in the accounting records at their historical (original) price’. Hence stock is recorded at its
cost price in the journals and ledgers rather than at its selling price. It is then presumed that we will sell our
stock at a higher price – many businesses will place a ‘mark up’ on their stock to determine its selling price.
A mark up is usually a fixed percentage of the cost price that is added to the cost price to determine the
selling price.
However, there are situations where stock is unable to be sold at its normal selling price. Indeed, there are
times when it cannot be sold above its cost price. This may be due to a number of factors:
 Stock is slightly damaged but still saleable

 Stock has been superseded by a newer model
 Stock is nearing its use by date (fresh food)/end of season (clothing)
In these circumstances a business will try to sell the stock rather than record it as a loss. When this situation
occurs, the business will adopt the concept of ‘Lower of cost and Net Realisable Value’.
Cost – original price paid for the stock
Realisable value – the estimated price at which stock could be sold for
Net realisable value (NRV) - the estimated price the stock could be sold for less any estimated costs
involved in selling the stock.
Once cost and NRV have been determined, the cost which is lower is identified.

Example
The business had the following stock item on hand at 4 December 2013:
Excel DVD Player – 20 units @ $80 each
The manufacturer has just notified the business that a new model of DVD player – the Excel DVD+ - will be
available in mid-July. The owner wishes to sell all current DVD players before the new model is available.
He decides to sell the DVD players at $70. To facilitate the sale the owner will advertise the special offer at a
cost of $5 per unit.
From this information we can see:
Cost = $80
Realisable Value = $70
Estimated selling costs = $5
Net Realisable Value = $65
Using this example - our stock is now only realistically worth $65 per unit, so our records must reflect that.
This is due to the accounting principle of conservatism which states, in part, ‘it is acknowledged that .....
losses will be recognised as soon as they are likely to occur’.
Recognising the loss requires entries to be made in the General Journal, stock card and general ledger and
the expense to be reported in the Income Statement.
General Journal
Dec 4 Stock Write Down 300
Stock Control 300
Stock Card item: Excel DVD Players

2013 Qty Cost Cost Qty Cost Cost Qty Unit Cost Cost
Jun 29 Balance 20 80 1 600
Jun 30 Memo 43 20 15 300 20 65 1 300
Extract from INCOME STATEMENT FOR YEAR ENDING 31 December 2013

Revenue $ $
Sales 7 000
Less Sales returns (100) 6 900
Gross Profit 3 400
Less Stock Write Down 300

Review Questions
16. The stock at end includes 4 units that have proved to be unpopular with customers. These units were
originally purchased for $90 each, and have had a selling price of $130. The business feels that they can
only sell them for $100, with a bonus given to sales staff of $20 for each pair of pants sold (memo 64).
Calculate the total NRV for the stock.
17. Prepare the General Journal entry necessary for the information above.


Stock Gain
At the end of a reporting period, the information that is shown in the Stock Cards is checked for accuracy of
recording. This is done using a physical stocktake whereby the actual amount of stock on hand is physically
counted. The result is then compared with the figure shown in the Stock Card.
In some circumstances the physical count reveals an amount greater than what is shown in the Stock Card.
This is known as a Stock Gain. It can occur due to:
 An oversupply of stock from the supplier

 An undersupply of stock to a customer
 A recording error
 An error on the original Invoice
A Stock Gain is Revenue and will be reported as such in the Income Statement.
Example
At the end of the reporting period a Stock Card revealed the following:
29/06/2013 Rec 45 3 50 150 20 50 1 000
A physical stocktake revealed that there were 21 units on hand.
Hence there is a Stock Gain of 1 unit. This is recorded in the General Journal, the Stock Card, the ledger
accounts and reported in the Income Statement.

Jun 30 Stock Control 50
Stock Gain 50

29/06/2013 Rec 45 3 50 150 20 50 1 000
30/6/2013 Memo 3 1 50 50 21 50 1 050

Extract from INCOME STATEMENT FOR YEAR ENDING 30 June 2013
Revenue $ $
Sales 6 900
Gross Profit 3 400
Plus Stock Gain 50
Review Questions
18. At 30 June 2013 the following information was available:
Stock as per Stock Control account: $46,700
Stock as per physical stocktake: $47,100
Prepare the General Journal entry necessary.


Prepaid Sales Revenue
Prepaid Sales Revenue is revenue received in advance or revenue received but not yet earned. The business
must determine what part of the revenue received has been earned and therefore must be reported in the
current reporting period. Prepaid Sales Revenue occurs when a customer orders stock to be delivered at
some time in the future (possibly in the next reporting period) and pays a deposit at the time of ordering.
Some or all of the stock may be delivered before the end of the reporting period.
There are two parts to this type of question students may be faced with:
 Recording the receipt of sales revenue in advance (not including GST)

 Delivery of some or all of the stock
Example
On 12 November 2013 a customer (Highview College) placed an order for sporting goods that had a total
selling price of $11 000 which included GST of $1 000. The total cost price of the stock was $5 000. The
customer paid a $5 000 deposit. On 29 December 2013 the sporting goods were delivered to the customer.
Firstly, we record the receipt of the deposit.
Cash Receipts Journal

Cost
Date Rec. Disc. Debtors of
2013 Details No. Bank Exp Control Sales Sales * Sundries GST
Prepaid Sales
Nov 12 Revenue 5 000 5 000
At 29 December 2013 when the stock is delivered an adjustment is required to recognise that the revenue has
now been earned.
General Journal
Prepaid Sales
Dec 29 Revenue 5 000
Sales Revenue 5 000
The remainder of the revenue now earned is recorded as ‘normal’ in the Sales Journal.
Sales Journal
Date Inv. Cost of Debtors
2013 Debtor No. Sales Sales GST Control
Dec 29 Highview College 5 000 5 000 1 000 6 000
If you ‘put’ all 3 entries together you will see that Sales Revenue is $10,000, GST incurred is $1,000, Cost
of Sales is $5,000 and the amount Debtors still owe is $6,000
This type of adjustment can be made more complicated by having not all stock delivered at the one time.

The key is to know what the ‘final’ answer should be and work ‘backwards’ to get this.
Review Questions
19. At 21 December 2013 the business received a $2,000 deposit from a customer (Highview College). The
deposit was for an order of 10 Elite keyboards. The keyboards have a cost price of $700 each and a
selling price of $1,500 plus $150 GST each.
The keyboards are scheduled to be delivered on 7 January 2013. On 7 January 2013 the stock was
delivered.
Prepare all journal entries necessary

Date Rec. Disc. Debtors Cost of
General Journal
Sales Journal

Other Prepaid Revenue
A second option mentioned above is where the business earns income from a secondary source – often Rent
Revenue.
Example
The business owns the adjoining shop and rents it out to a business providing repairs to electrical appliances.
The rental arrangement provides for the business to pay $2,000 (+ $200 GST) per month, 6 months in
advance. The last payment was made on 1 November 2013 (Rec. 113).
The task is to determine the amount of revenue earned for the period ending 31 December 2013.
Firstly, we record the receipt of the revenue.
Rec. Disc. Debtors Cost of
Date Details No. Bank Exp Control Sales Sales * Sundries GST
Prepaid Rent
Nov 1 Revenue 113 13 200 12 000 1 200
At 31 December 2013 an adjustment is required to recognise the amount of revenue earned.

General Journal
Debit Credit Debit Credit
Prepaid Rent
Rent Revenue 4 000
Prepaid Rent Revenue

Date Cross-reference Amount Date Cross-reference Amount
2013 2013
Dec 31 Rent Revenue 4 000 Nov1 Bank 12 000
Balance 8 000
12 000 12 000

Extract from INCOME STATEMENT FOR PERIOD ENDING 31 Dec 2013
Revenue $ $
Sales 5 640
Less Cost of Goods Sold
Cost of Sales 2 570
Plus Freight In 220 2 790
Gross Profit 2 850
Plus Other Revenue
Rent Revenue 4 000
6 850
Review Questions
20. On 1 February 2013 the business signed a contract with an electrical repair service business to rent out a
section of the shop. The agreement stated they would pay $1 000 per month in rent, 3 months in advance.
Calculate the amount of Rent Revenue to be reported at 31 December 2013.
21. Show the General Journal entry required on 31 December 2013 using the information above.


Accrued Revenue
This is Revenue the business has earned but not yet received. As a result, there is an Asset created because
there is an expected inflow of economic benefit at some point in the future. Like a credit sale – revenue
earned but not yet received with a Debtor created that leads to an expectation of an inflow in the near future.
However, this adjustment is not for that form of revenue. Over their life a business may develop other
sources of revenue. These sources will be small and often inconsistent but must be considered if we wish the
reports to be relevant.
The most common type of revenue in this situation is Interest Revenue.
Example
On 1 November 2013, Allen’s Appliances invested $8,000 of business funds into a 12 month term deposit
(expiration date 30-October 2013) earning 6% interest, with interest payable quarterly (1 February, 1 May, 1
August, 1 November).
At 31 December 2013 (balance day), the business has earned interest revenue from this investment but is yet
to receive this revenue.
6% of $8000 = $480 per annum
$480 ÷ 12 = $40 per month
2 months Interest Revenue earned = $80 (November & December)
General Journal
Debit Credit Debit Credit
Accrued Interest
Revenue 80
Interest Revenue 80
As with Prepaid Revenue discussed earlier, the amount of revenue earned in this transaction will need to be
reported in the Income Statement.
The next stage of this transaction is the receipt of the revenue on 1 February 2013. This will be recorded in
the Cash Receipts Journal, however, we must be aware that the Interest Revenue for the full quarter (3
months) will be received, not just the amount accrued.

The entry will appear as:

Rec. Disc. Debtors Cost of Interest
Date Details No. Bank Exp Control Sales Sales Revenue Sundries GST
Accrued Interest
Feb 1 Revenue 58 120 80
Interest Revenue 40
Review Questions
22. The owner decides to invest $15 000 in a 12 month Term Deposit Account on 1 August 2013. The
interest rate is 6% per annum paid in two instalments on 31 January 2013 and 31 July 2013.
Prepare the General Journal entry necessary on 31 December 2013 to record the Interest Revenue earned.

23. Explain how Accrued Interest Revenue would be reported in the Balance Sheet at 31 December 2013.
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24. Prepare the Cash Receipts Journal entries required at 31 January 2013 [Rec. 97].

Date Rec. Disc. Debtors Cost of Interest
2013 Details No. Bank Exp Control Sales Sales Revenue Sundries GST

Solutions to Review Questions
1. Relevance requires us to report information that is useful for decision-making, hence a business should
report an accurate figure for profit. To calculate this period’s profit we must match this period’s expenses
against this period’s revenue. This requires adjustments so amounts are correctly identified.
2. Historical Cost = 42,000 + 1,000 + 2000 = 45,000

Residual Value = $9,000
Depreciable Value = 45,000 – 9,000 = $36,000
Depreciation Expense = 36,000/6 = $6,000 per annum = 6,000/12 = $500 per month x 11 months =
$5,500
3. Residual value – the amount a business expects to sell an asset for at the end of its useful life.
Accumulated depreciation – the total amount of depreciation charged against an asset at a point in time
4.
Depreciation -
Equipment 2 500
Accumulated
Depreciation -
Equipment 2 500
5.

1 54000 9180 9180 54000 5000 5000
2 44820 7619 16799 54000 5000 10000
3 37201 6324 23124 54000 5000 15000
4 27648 4700 27824 54000 5000 20000
5 22948 3901 31725 54000 5000 25000
6 19047 3238 34963 54000 5000 30000
7 15809 2687 37650 54000 5000 35000
8 13121 2231 39881 54000 5000 40000
6. In Year 3 depreciation using Reducing Balance is $6,324 as opposed to $5,000 using the Straight-line
method. Profit is therefore lower by $1,324.

7.
Mar 4 Bad Debts 700
Debtors Control 700
Dr- H. Green 700
8. Bad Debts represent a reduction in inflow of economic benefits in the form of a decrease in Assets
(Debtors Control) that leads to a decrease in Owner’s Equity that isn’t Drawings.
9. If a business orders a certain amount of stock and the quantity delivered by the supplier is less, then they
have been undersupplied.
10.
Jun 30 Stock Loss 500
Stock Control 500
11. Prepaid Rent is a current asset as it represents a future economic benefit that the business owns as a
result of a past transaction. This benefit will be received in next 12 months.
12. The expense will be:

$4,800 paid in advance + 8 months of the 12 months paid on 1 November
$18,000 / 12 = $1,500 per month x 8 months = $12,000
Expense = $16,800
13. General Journal

$ $ $ $
Advertising Expense
Jun 30 16 800
16 800
Prepaid Advertising Expense
14. Accrued Wages represent a future obligation of an outflow of economic resources which will be met in
the next 12 months.
13.
Dec 31 Wages 1 200
Accrued Wages 1 200

14.
Calculation
$100 - $20
$80 x 4
Total NRV $ 320
15.
Stock Write Down 40
Stock Control 40
16.
Jun 30 Stock Control 400
Stock Gain 400
17.
Date Rec. Disc. Debtors Cost of
Prepaid Sales
Dec 21 Revenue 2 000 2 000
General Journal
Prepaid Sales
Jan 7 Revenue 2 000
Sales Revenue 2 000
Sales Journal
Jan 7 Highview College 7 000 13 000 1 500 14 500
18. Rent Revenue is $1,000 per month for 11 months = $11,000

19.
Prepaid Rent
Rent Revenue 2 000
20.
Accrued Interest
Dec 31 Revenue 375
Interest Revenue 375
21. Accrued Interest Revenue represents a future inflow of economic resources as a result of a past
transaction. This inflow will occur with the next 12 months meaning the item will be classified as a
Current Asset in the Balance Sheet.
22.
Date Rec. Disc. Debtors Cost of Interest
2013 Details No. Bank Exp Control Sales Sales Revenue Sundries GST
Accrued Interest
Jan 31 Revenue 97 450 375
Interest Revenue 75

Accounting TOPIC 10 - Balance Day Adjustments

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Accounting

Teach Yourself Series

A: Level 14, 474 Flinders Street Melbourne VIC 3000

© TSSM 2013 Page 1 of 33

Balance Day Adjustments .................................................................................................................................. 3

© TSSM 2013 Page 2 of 33

Balance day adjustments can be grouped into two broad categories:

Expense adjustments involve transactions for:

Revenue adjustments involve transactions for:

© TSSM 2013 Page 3 of 33

© TSSM 2013 Page 4 of 33

© TSSM 2013 Page 5 of 33

 Historical Cost - $10 000 + $ 1 000 = $11 000

 Estimated Life – 5 or 8 years?

 Scrap Value - $2 000

 Thus 11 000 – 2 000 /5 = $ 1 800 per annum

 Depreciation on Photocopier per month = $1 800 / 12 = $150

Assume balance day is 30 June 2013:

Balance Sheet Extract 2013

Non Current Assets

© TSSM 2013 Page 6 of 33

© TSSM 2013 Page 7 of 33

Reduced Depreciation Accumulated Historical Depreciation Accumulated

The effect on profit of using the different methods is:

© TSSM 2013 Page 8 of 33

Cost $42 000

3. Provide definitions for the following terms:

ii. Accumulated depreciation

Date Particulars General Ledger Subsidiary Ledger

© TSSM 2013 Page 9 of 33

Reducing Balance Straight Line

Reduced Depreciation Accumulated Historical Depreciation Accumulated

© TSSM 2013 Page 10 of 33

A Bad Debt occurs when a Debtor is unable to pay their debt.

There are two scenarios:

1. Debtor can’t pay any of the amount owed

Date Particulars General Ledger Subsidiary Ledger

Date Particulars General Ledger Subsidiary Ledger

© TSSM 2013 Page 11 of 33

Date Particulars General Ledger Subsidiary Ledger

8. Explain why Bad Debts is considered an expense.

© TSSM 2013 Page 12 of 33

A physical stocktake revealed that there were 19 units on hand.

Date Particulars General Ledger Subsidiary Ledger

Date Details IN OUT BALANCE

© TSSM 2013 Page 13 of 33

Less Cost of Sales 3 500

Gross Profit 3 400

Less Stock Loss 50

Adjusted Gross Profit 3 350

9. Explain what is meant by an undersupply by supplier.

Date Particulars General Ledger Subsidiary Ledger

© TSSM 2013 Page 14 of 33

As it appears in Units 2 & 3

 Recording the payment of the prepaid expense

The entry in the Cash Payments Journal would be:

Cash Payments Journal

Date Particulars General Ledger Subsidiary Ledger

The Prepaid Insurance Expense account would appear as: