Adjusting Entries

ACT3110 – Accounting and Financial

Information
Content
Adjusting entries
Types of adjusting entries
Adjusting the NCA
Errors that are not revealed in Trial Balance
From non-adjusted trial balance to adjusted trial
balance and preparation of financial statements:
Illustration – Amani Consultancy
Adjusting Entries
 Transfer all account Accounting Cycle Source documents:
balances in FS: • Invoices
• Permanent accounts
• Receipts
[A, L, E(C)]
• Payroll slips
• Temporary accounts
• Cheques
[I, Exp]
• Bank statements

Adjust accounts
for:
• Year end
transactions –
e.g. depreciation
• Errors
• Unrecorded
accrual and
prepayments
The need for adjusting entries
 Ensure that the revenue recognition and expense
recognition principles are followed.
 expenses are recognized in the period in which they are
incurred.
 revenues are recorded in the period in which services
are performed.

 Necessary because the trial balance may not

contain up-to-date and complete data.
 balance sheet and income statement accounts have correct
balances at the end of an accounting period.
Types of adjusting entries
DEFERRALS ACCRUALS
Prepaid Expenses Accrued Expenses

Unearned Revenue / Accrued Revenue /

Prepaid Revenue / Accrued Income
Prepaid Income

Others:
• Year end transactions – depreciation, tax
• Correction of errors – if discovered
Adjusting the NCA – Depreciation
 2
Accounting for Depreciation
• Over time, NCA/fixed assets such as equipment,
buildings, and land improvements lose their ability to
provide services.
• The periodic recording of the cost of NCA/fixed assets to
expense is called depreciation.
• Represents the trend in use of NCA/fixed assets.
• Maybe due to:
1. Physical depreciation factors include wear and tear during
use or from exposure to weather.
2. Functional depreciation factors include obsolescence and
changes in customer needs that cause the asset to no longer
provide services for which it was intended.
 2
Accounting for Depreciation
Caution:
• Depreciation does not measure a decline in the market
value of a NCA/fixed asset.
• Depreciation does not provide cash to replace NCA/fixed
assets as they wear out.

Factors Considered in Estimating Depreciation

1. Asset’s initial cost.
2. Asset’s expected useful life.
3. Asset’s estimated residual value.

# The residual value of a fixed asset at the end of its useful life is
estimated at the time the asset is placed into service
 2
Accounting for Depreciation
Straight-Line Method
The straight-line method provides for the same amount of
depreciation expense for each year of the asset’s useful life.

Annual Cost –Residual Value

=
Depreciation Useful life
 2
Accounting for Depreciation
Straight-Line Method
A depreciable asset cost $24,000. Its estimated residual value is
$2,000 and its estimated useful life is five years.

Annual =
Depreciation

If the preceding equipment was purchased and placed into service

on October 1, the depreciation would be $1,100, computed as
follows:
 2
Accounting for Depreciation
Straight-Line Depreciation : an Example
Equipment acquired at the beginning of the year at a cost of
$125,000 has an estimated residual value of $5,000 and an
estimated useful life of 10 years. Determine (a) the depreciable
cost, (b) the straight-line rate, and (c) the annual straight-line
depreciation.
 2
Accounting for Depreciation
Units-of-Production Method
The units-of-production method provides for the same amount of
depreciation expense for each unit produced or each unit of capacity
used by the asset.
Depreciation
per Unit Cost – Residual Value
=
Total Units of Production
 2
Accounting for Depreciation
Units-of-Production Method
A depreciable asset cost $24,000. Its estimated residual value is
$2,000 and it is expected to have an estimated life of 10,000
operating hours.
Depreciation per
=
Unit

During the year, the asset was operated for 2,100 hours.

Depreciation
=
Expense
=
 2
Accounting for Depreciation
Units-of-Production Depreciation: an Example
Equipment acquired at a cost of $180,000 has an estimated
residual value of $10,000, has an estimated useful life of
40,000 hours, and was operated 3,600 hours during the year.
Determine (a) the depreciable cost, (b) the depreciation rate,
and (c) the units-of-production depreciation for the year.
 2
Accounting for Depreciation
Reducing Balance Method
• provides for a declining periodic expense over the
estimated useful life of the asset.
• a shortcut to determining the straight-line rate is to
divide one by the number of years and for double-
declining-balance method, the rate is times with 2.
• Example: Assets with 10 years useful life
 Depreciation rate: 1/10  0.10 => 10%
 Double-declining-rate: 10% x 2 => 20%
 2
Accounting for Depreciation
Reducing-Balance Method: an Example
Equipment acquired at the beginning of the year at a cost of
$125,000 has an estimated residual value of $5,000 and an
estimated useful life of 10 years. Determine (a) the
depreciation rate, (b) the depreciation expense for the first
year, (c) the depreciation expense for the third year.
Journal entry
Provision for Depreciation – annual estimation

Dt. Depreciation Expenses RMXXX

Cr. Accumulated Depreciation RMXXX
 FS: Income Statement – Sample
Mazola Ptd
Income Statement for the year ending 31 December 2020
Revenue 100,000
Other Income 20,000
120,000
Operating expenses:
Depreciation expenses
- Delivery Truck 2,500
- Building 3,600
Other expenses 55,100(61,200)

Net profit 58,800

 FS: Balance Sheet – Sample
Mazola Ptd
Balance Sheet as at 31 December 2020

Fixed Assets/Non-current Assets

Property, plant & Equipment:
Land 450,000
Delivery Truck 65,000
Less: Acc. Depreciation (5,000) 60,000

Building 120,000
Less: Acc. Depreciation (43,200) 76,800
Total 586,800
Calculating Depreciation
Mazola Enterprise purchased a machine that cost RM500,000 with a useful life of
30 years. As at the purchase date, it was estimated that the residual value will be
RM20,000. Mazola financial year ends every 31 December.
Scenarios Purchase date Policy
Scenario 1 1 Jan 2020
Scenario 2 30 June 2020 Full depreciation in the year of
purchase
Scenario 3 20 December
2020
Scenario 4
Depreciation by month of use
Scenario 5 1 October 2020

For all of the above scenarios, determine the followings.

a. The annual depreciation expense and depreciation expense for the first year
b. Accumulated depreciation at the end of 2025
c. The carrying amount of the machine at the end of 2025.
 Calculating Depreciation
Annual First year’s Accumulated Carrying amount
S
RM RM RM RM

5
Types of Errors Not Revealed in
Trial Balance
Types of errors
There are seven errors that may exist in the double
entry bookkeeping but will not be revealed in a trial
balance:
1. Errors of omission
2. Errors of commission
3. Errors of principle
4. Compensating errors
5. Errors of original entry
6. Complete reversal of entries
7. Transposition errors
1. Error of omission
 a transaction is completely omitted from the books.
 A sale of RM59 worth of goods to E. George has been
completely omitted from the books.

RM RM
2. Error of commission
 a transaction is posted to the wrong account name.
 A purchase of RM44 worth of goods from C. Simons on 4
September was entered in error in C. Simpson’s account.
The error was found on 30 September.

RM RM

RM RM

RM
3. Error of principle
 a transaction is posted to the wrong class of account, for instance
confusing assets with expenses.
 The purchase of a machine for RM200 is debited to the purchases
account instead of being debited to a machinery account.

RM RM
4. Compensating error
 where two completely separate errors cancel each other
out
 In the cash book (cash account), the amount of cash sales
transferred to the sales account was overstated by RM20 and
the amount transferred to the wages account was also
overstated by RM20.

RM RM

Correction of two overcasts of RM20 posted from the cash book to the sales account
and the wages account which compensated for each other
5. Error of original entry
 where the figure posted is incorrect.
 A sale of RM38 to A. Smailes was entered in the books
as RM28.

RM RM

Correction of error whereby sales were understated by RM10

6. Complete reversal of entries
 where the correct accounts are used but the postings were made on the
wrong side of the accounts.
 A payment of cash of RM32 to M. Dickson was entered on the receipts
side of the cash book in error and credited to M. Dickson’s account.

RM RM

Payment of cash RM32 debited to cash and credited to

M. Dickson in error on … Error now corrected
7. Transposition error
 where the figures posted have been transposed, so RM142
was entered instead of RM124.
 A credit purchase from P. Maclaran costing RM56 was
entered in the books as RM65.

RM RM

Correction of error whereby purchases were overstated by RM9

Adjusting Entries Exercise
Amani Consultancy
(Service)
First thing first – analyse the question
Financial year end date:
Current financial year:
Requirement of the question:
Adjusting entries questions
Starts with Unadjusted Trial Balance

Required to:
do adjusting entries (journal entries to adjust the
balances of related accounts)
draft adjusted trial balance
prepare financial statements from adjusted trial
balance
 Amani Consultancy
(Unadjusted) Trial Balance as at 31 December 2020
CREDIT
DEBIT (RM)
(RM)
Bank 972,500
Owner’s Equity 206,400
Revenue 1,250,000
Office equipment and furniture – at cost 55,000
Accumulated depreciation – office equipment
12,500
and furniture (1 Jan 2020)
Office supplies 1,250
Account receivables 90,500
Motor vehicles – at cost 75,000
Accumulated depreciation – motor vehicle (1 Jan
18,850
2020)
Maintenance expense 15,500
Bank loan 70,000
Salary expense 348,000
TOTAL 1,557,750 1,557,750
Recording the adjustments
 Amani Consultancy
The Adjusting Entries
Dates Debit RM Credit RM
a)

b)

c)

d)

e)
 Amani Consultancy
The Adjusting Entries
Dates Debit RM Credit RM
f)

g)

h)

i)
 Amani Consultancy
The Adjusting Entries
Dates Debit RM Credit RM
j)

k)

l)

m)

n)
 Basis of preparation
Basis of
TOTAL REVENUE TOTAL EXPENSES
preparation

CASH BASIS

ACCRUAL
BASIS