ACCT103: Journal entries for

adjusting, closing, reversing and

correcting the accounts
Carlon et al. (2022) Chapter 3

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 The Accounting Cycle
• During the accounting period (e.g. 1 April 2022 to 31 March 2023):
– Record transactions in general and special journals on a daily basis
– Post transactions to general and subsidiary ledgers on a regular basis (e.g.
monthly)
– Prepare trial balance on a regular basis (and fix any errors)
• At the end of the current accounting period:
– Prepare trial balance
– Prepare balance day adjustments (due to timing differences; cash vs. accrual
accounting)
– Prepare adjusted trial balance
– Prepare closing entries (transfer balances of temporary accounts to equity
account; calculate profit or loss)
– Prepare financial statements
• At the beginning of the next accounting period:
– Prepare reversals (this reverses some balance day adjustments).
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 Trial Balance

Left-hand side: Debits Right-hand side: Credits

Assets, expenses, dividends paid Liabilities, equity, revenue

Total of debits = Total of credits

Three types of trial balances:

Unadjusted: Prepared on a regular basis (e.g. weekly)
Adjusted: Prepared at the end of the accounting period after
balance day adjustments have been completed.
Post-closing: Prepared at the end of the accounting period after
expense and revenue accounts have been closed.

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 Cash vs. Accrual Accounting
• Cash Accounting
– Recognise (i.e. record) revenue/expense when cash is received/paid.
• Accrual Accounting
– Recognise (i.e. record) revenue when probable & reliably measurable.
– Recognise expenses when incurred... either directly by association
with a revenue event or indirectly by association with the accounting
period.
• Cash or accrual accounting?
– Most firms use a mixture of cash & accrual accounting.
– Accrual accounting used for irregular and large transactions, and when
control is important.
– Cash accounting used for regular transactions such as wages and rent.

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 Accrual Accounting
• Accounts that only exist under accrual accounting:
– Accounts payable (or accrued expenses)
– Accounts receivable (or accrued revenue)
– Prepaid expenses (paid in advance of goods or services being
received), e.g. insurance and rent
– Unearned revenue (received in advanced of goods or services being
provided), e.g. subscriptions or annual fees
• E.g. A university charges students fees before they attend courses. The
university earns the revenue throughout the semester as it delivers the
courses to students.
– Depreciation and amortization of assets
– Provisions or allowances, e.g. provision of doubtful debtors

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 Accrual Accounting (continued)
• Why are adjusting journal entries (or balance day
adjustments) required?
– Transactions and events occur over a period of time,
and continuously throughout the operating cycle
– End of accounting period will “cut across” operating
cycle
– Therefore, at the end of the period there is a need to
adjust some ledger accounts to reflect recognition of
revenue and expenses, so that a company's
comprehensive income and financial position is
accurately measured.
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 Balance Day Adjustments
• Why are balance day adjustments required?
– Some transactions occur in two accounting periods; Ensure
revenue and expenses recognised in correct accounting
period.

Insurance (1/10/22 to
1/10/23)
1 April 22 1 April 23 1 April 24
Accounting period 1 Accounting period 2

Adjust accounts on balance date so that half of the cost of

insurance is an expense and half is a prepaid expense (asset).
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 Balance Day Adjustments
• Types of balance day adjustments
– Accruals (same as accounts receivable and payable except no invoices):
• Revenue transaction: Goods or services are provided in this accounting period, but
cash is not received until the next accounting period.
• Expense transaction: Goods or services are received in this accounting period, but
cash is not paid until the next accounting period.
– Deferrals (or prepayments):
• Revenue transaction: Cash is received in this accounting period, but goods or
services are provided the next accounting period.
• Expense transaction: Cash is paid in this accounting period, but goods or services
are received in the next accounting period.
– Valuing assets (including depreciation and allowances):
• Straight-line method of depreciation: Calculated as (the asset's value less it's
residual value) divided by it's useful life.
• Allowances and provisions will be discussed later (e.g. accounts receivable and the
allowance for doubtful debts).
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 List of Adjusting Journal Entries
Accruals
Revenue-type: Dr Accrued revenue (a current asset) and Cr Revenue
Expense-type: Dr Expense and Cr Accrued expense (a current liability)
Deferrals
1. Income statement approach
Revenue-type:
Original transaction: Dr Bank and Cr Revenue
Adjustment: Dr Revenue and Cr Unearned Revenue (a current liability)
Expense-type:
Original transaction: Dr Expense and Cr Bank
Adjustment: Dr Prepaid expense (a current asset) and Cr Expense
2. Balance sheet approach
Revenue-type:
Original transaction: Dr Bank and Cr Unearned Revenue
Adjustment: Dr Unearned revenue and Cr Revenue
Expense-type:
Original transaction: Dr Prepaid expense and Cr Bank 9
Adjustment: Dr Expense and Cr Prepaid expense
 Adjusting Journal Entries –
Prepayments
• Prepayments occur when cash is received (or paid) before
goods or services are provided to customers (or received from
suppliers).
• Adjusting journal entries are required when part or all of the
prepayment relates to the next accounting period.
• There are two types of prepayments:
– Revenue transaction: Cash is received in this accounting period,
but goods or services are provided the next accounting period.
– Expense transaction: Cash is paid in this accounting period, but
goods or services are received in the next accounting period.

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 Example 1: Prepayments
• On 1 March 2023, a landlord received $6,000 for the next
three months rent from the tenant.
• The balance date for the landlord is 31 March 2023.
• Required: Prepare journal entries for the landlord to account
for events on 1 and 31 March 2023.
– Transaction analysis:

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 Example 1: Prepayments
Alternative 1 Alternative 2
General Journal General journal
1/3 1/3

(Received 3 months rent) (Received 3 months rent)

31/3 31/3

(2 months rent unearned) (1 month rent earned)

Account Balances Account Balances
Bank: Bank:
Rent revenue: Rent revenue:
Unearned revenue: Unearned revenue:

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 Example 2: Prepayments
• On 1 November 2022, a company paid $15,000 for insurance
for the next twelve months.
• The balance date for the company is 31 March 2023.
• Required: Prepare journal entries for the company to account
for events on 1 Nov 2022 and 31 Mar 2023.
– Transaction analysis:

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 Example 2: Prepayments
Alternative 1 Alternative 2
General Journal General journal
1/11 1/11

(Paid insurance for 12 months) (Paid insurance for 12 months)

31/3 31/3

(Insurance is prepaid for 7 months) (Used 5 months of prepaid

insurance)
Account Balances Account Balances
Bank: Bank:
Insurance expense: Insurance expense:
Prepaid insurance: Prepaid insurance:

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Adjusting Journal Entries – Accruals
• Accruals occur when cash is received (or paid) after goods or
services are provided to customers (or received from
suppliers).
• Adjusting journal entries are required when part or all of the
accruals relates to the next accounting period.
• There are two types of accruals:
– Revenue transaction: Goods or services are provided in this
accounting period, but cash is not received until the next
accounting period.
– Expense transaction: Goods or services are received in this
accounting period, but cash is not paid until the next accounting
period.

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 Example 3: Accruals
• On 1 December 2022, a company invested $100,000 in a term
deposit with an interest rate of 4.5% p.a. (interest is paid
annually).
• The balance date for the company is 31 March 2023.
• Required: Prepare journal entries for the company to account
for events on 1 Dec 2022 and 31 Mar 2023.
– Transaction analysis:

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 Example 3: Accruals
General Journal
1/12

(To record term deposit)

31/3

(To record interest accrued on term deposit)

Account Balances
Current Assets: Bank: ; Term deposit: ;
Interest accrued:
Revenue: Interest revenue:
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 Example 4: Accruals
• A company has a fortnightly wages expense of $50,000.
Wages were paid on 24 March 2023, and are due to be paid
next on 7 April 2023.
• The balance date for the company is 31 March 2023.
• Required: Prepare journal entries for the company to account
for events on 31 Mar 2023.
– Transaction analysis:

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 Example 4: Accruals
General Journal
31/3

(To record wages owed, but not paid)

Account Balances
Expenses: Wages expense:
Current Liabilities: Wages accrued:

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 Adjusting Journal Entries –
Depreciation
• Depreciation recognises that while assets provide 'future
economic benefits', these benefits are consumed (or
decrease) over time.
• Physical non-current assets e.g. buildings, equipment,
vehicles, etc.
– Non-current assets usually have finite economic lives.
– The benefits of owning non-current assets are consumed
over the life of the assets.
– This consumption of benefits is recorded as an expense
called 'depreciation'.
– There are several methods of estimating depreciation, but
at this point in the course, only the straight-line method
will be used.
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 Adjusting Journal Entries –
Depreciation (continued)
• The straight-line method of depreciation:
– Assumes that the economic benefits of an asset are consumed
uniformly over it's useful life.
– The depreciation expense is calculated as: The asset's value less
it's residual value divided by it's useful life.
• For example, a photocopier is purchased for $5,000, it has a
useful life of 5 years, and a residual value of $500. Therefore,
the depreciation expense would be $900 per year (= ($5,000 -
$500) / 5).
– The useful life and residual value are only estimates!

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 Example 5: Depreciation
• A taxi company purchases a new car on 1 April 2021 for
$35,000. It is has an estimated useful life of 5 years and
residual value of $5,000.
• The balance date for the company is 31 March.
• Required: Prepare journal entries for the company to account
for depreciation on 31 March 2022 and 31 March 2023.
– Transaction analysis:

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 Example 5: Depreciation
General Journal
31/3/22

(To record depreciation)

Account Balances
Expenses: Depreciation:
Assets: Accumulated Depreciation:

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 Accounting for Depreciation

Depreciation is an expense account

Instead of offsetting depreciation against the asset (i.e. Dr
Depreciation expense and Cr Asset), the amount of
depreciation is accumulated in a contra-asset account know
as 'accumulated depreciation' (i.e. Dr Depreciation expense
and Cr Accumulated Depreciation).

A contra-asset account is similar to a liability account (i.e.
Dr = Decrease and Cr = Increase).

Why? Because offsetting is not allowed under NZ IAS 1.

Why? To provide more information to users, i.e. both the
value of the asset and the amount of accumulated
depreciation are reported.

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 Example 5: Depreciation
Taxi Company
Statement of Comprehensive Income 31st March 2022
(extract)
Income Statement
Expenses

Taxi Company
Statement of Financial Position 31st March 2022
(extract)
Statement of Financial Position
Non-current Asset

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 Example 5: Depreciation
General Journal
31/3/23

(To record depreciation)

Income Statement
Expenses

Statement of Financial Position

Non-current Asset

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 Closing the Accounts
• Accounting equation: Assets = Liabilities + Equity (+ Revenue –
Expenses)
– Asset, Liability and Equity accounts are permanent.
– Revenue and expense accounts are temporary.
– To measure income (or profit), revenue and expense accounts must be reset
to zero at the end of each accounting period.
• Closing the accounts
– A profit and loss summary account is a “clearance” account and the balance is
transferred to an equity account (e.g. retained earnings).
• Transferring expenses: Dr P&L summary and Cr Expense
• Transferring revenues: Dr Revenue and Cr P&L summary
– P&L summary: Debit balance is a profit; Credit balance is a loss.
• Transferring a profit: Dr P&L summary and Cr Retained earnings
• Transferring a loss: Dr Retained earnings and Cr P&L summary
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 Closing journal entries (continued)
Expense Accounts Revenue Accounts
Normal Income Income Normal
balance summary summary balance

Income Summary Account Equity Account

Expense Revenue Dividends (or Normal balance
accounts accounts Drawings)
Equity account Equity account Income Income
(profit) (loss) summary (loss) summary (profit)

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 Example 6 Accounts payable
Debit Credit
$ 84,475
Accumulated depreciation on
Bright Sparks Ltd is a fixtures and fittings
$ 120,000
specialist lighting Bank $ 18,100
Cost of goods sold $ 460,950
store. The business is Depreciation on fixtures and
$ 40,000
fittings
owned and operated Dividends, E. Sparks $ 26,500
by Edward Sparks. Fixtures and fittings $ 420,000
Insurance expense $ 10,560
Bright Sparks Ltd’s Interest expense $ 15,400
Adjusted Trial Balance Inventory at 30 June 2023 $ 124,165
Loan $ 148,885
as at 30 June 2023 is Owner’s equity, E. Sparks at 1
$ 280,800
shown. July 2022
Prepaid insurance $ 1,760
Sales $ 737,000
Wages accrued $ 4,975
Required: Wages expense $ 258,700
Prepare the closing TOTAL $1,376,135 $1,376,135
entries for the period
ending 30 June 2023.
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 Example 6
Date Particulars Debit Credit
30/6
30/6

30/6
30/6
 Reversing Journal Entries

Reversing journal entries are the opposite of
the adjusting journal entries.

Also known as 'reversals'.

Reversals are made for prepayments and
accruals, but not depreciation.

Adjustments are made because some or all of the
income and expenses related to the following
accounting period.

Reversals are needed to recognise the income and
expenses in the following accounting period.

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 Reversals
• Reversals are only made for accruals and some deferrals.
• Accruals
– Adjusting journal entries are necessary for accruals to recognise income and
expenses that are owing from customers or owed to suppliers, but there are
no source documents (e.g. no invoice).
– However, the transactions underlying accruals are typically not recognised
until source documents are exchanged. So reversals are necessary. When
source documents are exchanged, then the transactions will be recognised in
the usual manner.
– Reversing journal entries:
• Revenue-type: Dr Revenue and Cr Accrued revenue
• Expense-type: Dr Accrued expense and Cr Expense
• Deferrals
– Recall, there are two ways of recording prepayments. Reversals are only
required under the income statement approach.
– Reversing journal entries:
• Revenue-type: Dr Unearned revenue and Cr Revenue
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• Expense-type: Dr Expense and Cr Prepaid expense
 Reversing Journal Entries – Prepayments

Recall, there are two ways of recording prepayments

Alternative 1: Record income or expense when cash is received
or paid, and then record prepayment at the balance date.

Alternative 2: Record prepayment when cash is received or paid,
and then record expense at the balance date.

Reduce prepayment by the amount relating to the period between
the date on which cash being received or paid and the balance
date.

Reversals are only needed for prepayments when they
are recorded under alternative 1.

Under alternative 1, prepayments are only recognised on the
balance date. Throughout the year, prepayments are treated as
income or expenses. Thus, reversals are needed after the
balance date.

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 Prepaid expenses: Journal entries for the
whole accounting cycle
Income Statement Approach Balance Sheet Approach
• Cash Paid • Cash Paid
DR Expense DR Prepaid Expense
CR Cash CR Cash
• Adjustment • Adjustment
DR Prepaid Expense DR Expense
CR Expense CR Prepaid Expense
• Closing • Closing
DR Income Summary DR Income Summary
CR Expense CR Expense
• Reversing • Reversing
DR Expense Nothing to record
CR Prepaid Expense • Goods or Services Received from
• Goods or Services Received from Supplier
Supplier DR Expense
Nothing to record CR Prepaid Expense

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 Unearned Revenue: Journal entries for the
whole accounting cycle
Income Statement Approach Balance Sheet Approach
• Cash Received • Cash Received
DR Cash DR Cash
CR Revenue CR Unearned Revenue
• Adjustment • Adjustment
DR Revenue DR Unearned Revenue
CR Unearned Revenue CR Revenue
• Closing • Closing
DR Revenue DR Revenue
CR Income Summary CR Income Summary
• Reversing • Reversing
DR Unearned Revenue Nothing to record
CR Revenue • Goods or Services Provided to Customer
• Goods or Services Provided to Customer DR Unearned Revenue
Nothing to record CR Revenue

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 Reversing Journal Entries – Accruals

Adjusting journal entries are necessary for accruals
to recognise income and expenses that are owing
from customers or owed to suppliers, but there are
no source documents (e.g. no invoice).

However, the transactions underlying accruals are
typically not recognised until source documents are
exchanged. So reversals are necessary.

When source documents are exchanged, then the
transactions will be recognised in the usual manner.

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 Accruals: Journal entries for the whole
accounting cycle
Revenue Expense
• Goods or Services Provided to Customer • Goods or Services Received from Supplier or Employee
Nothing to record – No invoice sent Nothing to record – No invoice received or no timesheet
• Adjustment • Adjustment
DR Accrued Revenue DR Expense
CR Revenue CR Accrued Expense
• Closing • Closing
DR Revenue DR Income Summary
CR Income Summary CR Expense
• Reversing • Reversing
DR Revenue DR Accrued Expense
CR Accrued Revenue CR Expense
• Invoice Send to Customer • Invoice Received from Supplier or Timesheet Received
DR Accounts Receivable from Employee
CR Revenue DR Expense
• Receive Payment from Customer CR Accounts Payable
DR Cash • Made Payment to Supplier or Employee
CR Accounts Receivable DR Accounts Payable
CR Cash 37
 Example 7: Reversing Entries
• Prepare reversing entries for the following
accounts on 1 April 2023:
– Commission accrued $1,575
– Prepaid rent $2,200
– Insurance accrued $1,140
– Office salaries accrued $7,670

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 Example 7: Reversing Entries
1/4/23

(To reverse commission accrued)

1/4/23

(To reverse prepaid rent)

1/4/23

(To reverse insurance accrued)

1/4/23

(To reverse office salaries accrued)

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 Correcting entries
Types of adjustments Actions required
• Omissions  Correcting entries are
unnecessary if records are free
• Mistakes
of errors
• Impairments  Errors should be corrected as
• Adjustments soon as discovered
 They can be journalised and
posted whenever an error is
discovered
 They involve any combination of
statement of financial position
and income statement accounts

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 Summary of Learning
• You will be able to:
– Describe the accounting cycle
– Explain the purpose of adjusting, closing, reversing
and correcting entries
– Prepare adjusting, closing, reversing and
correcting entries
– Explain the difference between the income
statement and balance sheet approaches for
deferrals (or prepayments)

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