FINANCIAL STATEMENT ANALYSIS (FIN621) Lecture 08

TYPES OF ADJUSTING ENTRIES 1. Entries to distribute expenditure benefiting more than one accounting period e.g. Fixed Assets, Pre-paid costs etc.

Treatment of Prepaid expenses If business paid certain expenses in advance, these expenses will initially taken as Assets.

Pre-paid costs e.g. Pre-paid rent, will be recorded as follows: DateDescriptionL/FDr.Cr. Prepaid Rent 12,000 Cash Account 12,000 Rent paid in advance

Pre-paid costs e.g. Pre-paid rent, will be recorded as follows: DateDescriptionL/FDr.Cr. Rent Expense 1,000 Prepaid Rent 1,000 Recording rent expense

Pre-paid costs e.g. Pre-paid Insurance, will be recorded as follows: DateDescriptionL/FDr.Cr. Prepaid Insurance 12,000 Cash Account 12,000 Insurance paid in advance

Pre-paid costs e.g. Pre-paid Insurance, will be recorded as follows: DateDescriptionL/FDr.Cr. Insurance Expense 1,000 Prepaid Insurance 1,000 Recording Insurance expense

TYPES OF ADJUSTING ENTRIES 1. Entries to distribute expenditure benefiting more than one accounting period e.g. Fixed Assets, Pre- paid costs etc. 2. Entries to distribute un-earned revenue i.e. revenue collected in advance (deferred revenue). Un-earned revenue i.e. revenue collected in advance (deferred revenue) is the liability of business for that accounting period. Un-earned revenue i.e. revenue collected in advance (deferred revenue) is the liability of business for that accounting period.

TYPES OF ADJUSTING ENTRIES 3. Entries to record accrued expenses. e.g. Unpaid salaries, Interest payable. 4. Entries to record accrued revenues. First recorded as Assets i.e. Revenue First recorded as Assets i.e. Revenue receivable. receivable.

UNEARNED AND EARNED REVENUES Unearned Revenue: Unearned Revenue: Revenues that have been collected in advance but services have not yet been rendered are called unearned revenues. Earned Revenues: Earned Revenues: The revenues earned when goods are delivered and services have been rendered. Such kind of revenues are called earned revenues.

MAKING ADJUSTED TRIAL BALANCE

ADJUSTED TRIAL BALANCE The Trial balance which is made after making adjusted entries is called adjusted Trial balance.

Khizr Property Dealer Adjusted Trial balance As on August 31,2006 ParticularsDr. Cr. Cr. Cash.16,105 Accounts Receivable. 18,504 Land.130,000 Building.36,000 Accumulated depreciation: building. 150 Office equipment. 5,400 Accumulated dep: office equipment. 45 Accounts Payable. 23,814 Owner’s equity. 180,000 Sales commission earned. 10,640 Advertising expenses. 645 Salaries expenses. 7,400 Telephone expenses. 400 Depreciation expenses: building. 150 Depreciation expenses: office equipment ,649214,649

Khizr Property Dealer Adjusted Trial balance As on August 31,2006 ParticularsDr. Cr. Cr. Cash.16,105 Accounts Receivable. 18,504 Land.130,000 Building.36,000 Office equipment. 5,400

Khizr Property Dealer Adjusted Trial balance As on August 31,2006 ParticularsDr. Cr. Cr. Accumulated depreciation: building 150 Accumulated depreciation: equipment 45

Khizr Property Dealer Balance Sheet As on August 31,2006 As on August 31,2006 AssetsRs. Liabilities & EquityRs. Cash 16,105 Accounts Payable 23,814 Accounts Receivables 19,504 Owner’s equity 183,000 Land 130,000 Building36,000 Less Accumulated Dep:15035,850 Office Equipment5,400 Less Accumulated Dep:455,355 TOTAL 206,814TOTAL206,814

Khizr Property Dealer Adjusted Trial balance As on August 31,2006 ParticularsDr. Cr. Cr. Cash.16,105 Accounts Receivable. 18,504 Land.130,000 Building.36,000 Office equipment. 5,400

Khizr Property Dealer Adjusted Trial balance As on August 31,2006 ParticularsDr. Cr. Cr. Accounts Payable. 23,814 Owner’s equity. 180,000

Khizr Property Dealer Adjusted Trial balance As on August 31,2006 ParticularsDr. Cr. Cr. Sales commission earned. 10,640 Advertising expenses. 645 Salaries expenses. 7,400 Telephone expenses. 400 Depreciation expenses: building. 150 Depreciation expenses: equipment. 45

Preparation of Financial Statements & Notes to the Accounts

Income Statement Income statement is made first because Net Income statement is made first because Net Income or Net Loss effects the Owner’s Equity. Logically, in order to know that what has been the effect of Profit or loss on Owner’s Equity, Income Statement is made first. Logically, in order to know that what has been the effect of Profit or loss on Owner’s Equity, Income Statement is made first.

Khizr Property Dealer Income Statement for the period ending August 31, 2006 RevenuesRs.Rs. Sales Commission earned. 10,640 Expenses Advertising expenses. 645 Salaries expenses. 7,400 Telephone expenses. 400 Depreciation expense: building 150 Depreciation expense: office equipment 458,640 Net Income. 2,000 Note: This is case of service business, and sole proprietorship. In the case of Merchandise & Manufacturing business, In the case of Merchandise & Manufacturing business,

STATEMENT OF OWNER’S EQUITY