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2 Your mobile phone bill shows that you have not settled last month’s amount. This month mobile phone bill shows an outstanding amount of $100 and the current amount of $80. Hence this outstanding amount of $100 is also known as accrued expense.

Balance Day Adjustments - Accrued Expenses –Phua CK is pretending to be calm but actually is very confused. He should have paid $ for the rent for the period from January to December –However, at the end of the period, he only paid $5 000 to Tan Ah Teck Pte Ltd due to negligence. He still owes the company $ He does not know the correct entries to reflect this! Scenario 1

Let us help him. –Should have paid: $ –Paid only:$ –Owed:$ This owing amount of $7 000 is also known as Accrued Rent Expense. Mr. Phua CK still owes Tan Ah Teck Ltd $7 000 that was not paid for the year of End of accounting period – December 2000

Balance Day Adjustments - Accrued ExpensesDefinition: Are expense that have been incurred for the accounting period BUT amount not yet paid for by the business. Are expense that have been incurred for the accounting period BUT amount not yet paid for by the business.

Balance Day Adjustments - Accrued Expenses Yes…. Credit entry because it is a liability (still owe people $) What is the nature of accrued expense? Debit or Credit entry?

JOURNAL Date Particulars Debit Credit Year 2000 Dec 31 $ $ $ Rent Expense Rent Expense Profit and Loss a/c Profit and Loss a/c Using Phua CK as an example. If Mr. Phua remembered to pay the rent amount in full, then the entries will be:- However, this is not the case. An additional ledger needs to be created – Accrued Rent Expense

RENT EXPENSES a/c Year 2000 Dec 31 Bank $5 000 Year 2000 Dec 31 Profit & Loss $ Bal c/d$7 000 Bal c/d$7 000JOURNAL Date Particulars Debit Credit Year 2000 $7 000 Dec 31 $7 000 Rent Expense Rent Expense Rent Expense (Accrued) Rent Expense (Accrued) Year 2001 Jan 1 Bal b/d $7 000 $12 000

Profit & Loss Account 2000 Dec 31 Expenses $ Balance Sheet as at Dec 2000 Liability Accrued Rent Expense $7 000 JOURNAL Profit & Loss a/c $ Profit & Loss a/c $ Rent Expense$ Rent Expense$ (Being rent expense closing off to P&L a/c) Date Particulars Debit Credit 2000 Dec 31

Definition Definition Credit/Debit nature? Credit/Debit nature? Is there a need to open another ledger for accrued expense? Is there a need to open another ledger for accrued expense? Post this ledger to P/L or Balance Sheet? Post this ledger to P/L or Balance Sheet? Summary Balance Day Adjustments - Accrued Expenses

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Your father is very angry! Due to Economic crisis, the company your father is working for is unable to pay him salary for this month. However, his salary will be delayed till next month.

13 Assume that your father is earning a monthly salary of $ The company will pay in total of $ to your father next month ($5 000 x 2), being one month of salary owing to your father. This owing salary is known as Salary. This applies same to firms whereby revenues owing to them is known as Assume that your father is earning a monthly salary of $ The company will pay in total of $ to your father next month ($5 000 x 2), being one month of salary owing to your father. This owing salary is known as ACCRUED Salary. This applies same to firms whereby revenues owing to them is known as Accrued Revenues. Definition Are revenues earned for the current accounting period but not yet received as cash payment.

14 Accrued Revenue/Outstanding Revenue Mr Tan sub-lets a building for Phua CK for a monthly rental of $ Due to Phua’s negligence, Mr Tan does not receive $ for period from January to December Instead Mr Tan only receives $5 000 from Phua. Mr Tan sub-lets a building for Phua CK for a monthly rental of $ Due to Phua’s negligence, Mr Tan does not receive $ for period from January to December Instead Mr Tan only receives $5 000 from Phua. Scenario 1

15 Accrued Revenue/Outstanding Revenue –Should have received: $ –Only received:$ –Outstanding revenue:$ This owing amount of $7 000 is also known as Accrued Rent Revenue. Mr. Tan still owes PCK Ltd $7 000 that was not paid for the year of End of accounting period – December 2000

16 Accrued Revenue/Outstanding Revenue $ received$7 000 owing 31 Dec 2000 $ earned 1 Jan May 2000 JOURNAL Rent Revenue (Accrued) Rent Revenue (Accrued) Rent Revenue Rent Revenue Date Particulars Debit Credit Year 2000 $7 000 Dec 31 $7 000

17 RENT REVENUE a/c Year 2000 Dec 31 Bank $5 000 Year 2000 Dec 31 Profit & Loss $ Bal c/d $ Bal c/d $7 000 $ Accrued Revenue/Outstanding Revenue Year 2001 Jan 1 Bal b/d $ PROFIT AND LOSS a/c Year 2000 Dec 31 Rent $ Revenue Revenue

18 BALANCE SHEET AS AT 31 DEC 2000 Current Asset Accrued Revenue $7 000 RENT REVENUE a/c Year 2000 Dec 31 Bank $5 000 Year 2000 Dec 31 Profit & Loss $ Bal c/d $ Bal c/d $7 000 $ Year 2001 Jan 1 Bal b/d $7 000

19 Balance Day Adjustments - Accrued Revenue Definition Definition Nature of the entry - Debit or Credit entry? Nature of the entry - Debit or Credit entry? Distinguish the differences in adjustments between the Accrued Expenses and Accrued Revenues Distinguish the differences in adjustments between the Accrued Expenses and Accrued Revenues

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Singtel has a promotion for new subscribers. If you paid the 6 months of mobile-phone monthly subscription upfront NOW, you get a free Nokia 8250.

Assuming that the monthly subscription is $20. You like the promotion and paid $1 200 (6x$20) immediately in order to get the new mobile phone. Hence you are paying in advance for the expense. The payment in advance of subscription fees ($1 200) is also known as Prepaid Expense.

Prepaid Expense/Payment in Advance Are expenses that have been paid in advance but NOT yet incurred for the current accounting period. Definition

? Since expense is a debit entry. If the expense had been prepaid, what will be the nature of the entry? Prepaid expense is like an asset to the firm as it is similar to people owing services to the firm. Hence a DEBIT ENTRY.

Prepaid Expense/Payment in Advance Phua CK learnt his lesson last time of not paying on time last year, so he decides to pay in advance to “save his face” this year. The rent expense for the accounting year of 2001 is $12 000, but he pays $ Hence he prepaid $6 000 for expenses that has not been incurred in Scenario 2

Prepaid Expense/Payment in Advance $ incurred$6 000 prepaid 30 June 2002 $ paid 1 Jan Dec 2001 Recall that the monthly rent expense is $ Hence from January to December 2001, the total rent is $ Phua CK prepaid rent expense of $6 000 for January to June 2002.

RENT EXPENSES a/c Year 2001 Dec 31 Bank $ Year 2001 Dec 31 Balance c/d $ Profit & Loss $ Profit & Loss $12 000JOURNAL Year 2001 $6 000 Dec 31 $6 000 Rent Expense (Prepaid) Rent Expense (Prepaid) Rent Expense Rent Expense Year 2002 Jan 1 Bal b/d $6 000 $ Date Particulars Debit Credit

Profit & Loss Account 2001 Dec 31 Expenses $ Balance Sheet as at Dec 2001 Current Assets Prepaid Rent Expense $6 000 Definition Definition Credit/Debit nature? Credit/Debit nature? What are the differences in adjustments between the accrued and prepaid expenses? What are the differences in adjustments between the accrued and prepaid expenses? Summary

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30 You have found a part-time job in MacDonald for three months. Your monthly salary is $500. By the end of the first month, you should have received $500 of what you have earned. However, the manager is such a nice person that he gives you $ (Two months’ salary). He understands that you need money to enjoy your school holidays. Balance Day Adjustments

31 Received :$500 x 2 (Two month’s salary) = $1 000 Earned :$500 Paid in advance :$500 This prepaid of salary (revenue) is known as Prepaid Revenue / Outstanding Revenue. $500 is the prepaid Revenue. Balance Day Adjustments

32 Prepaid Revenue/ Outstanding Revenue DEFINITION Are revenues received in advance for which the services not yet rendered/earned in the particular accounting year. Hence the received cash for such revenues is not considered as revenues for the current accounting year.

33 Prepaid Revenue/ Outstanding Revenue Recall that Mr Phua CK decided to pay in advance his rents to “save face”. Hence Mr Tan received $18 000, in which $ is the revenue earned for the accounting year of 2001 and $6 000 is prepaid revenue. Scenario 2

34 $ earned$6 000 in advance $ received JOURNAL Prepaid Rent Expense Prepaid Rent Expense Rent Expense Rent Expense Date Particulars Debit Credit Year 2001 $6 000 Dec 31 $ June Jan Dec 2001 Prepaid Revenue/ Outstanding Revenue

35 RENT REVENUE a/c Year 2001 Dec 31 Bank $ Year 2001 Dec 31 Profit & Loss $ Prepaid rent $6 000 Revenue $ PROFIT AND LOSS a/c Year 2001 Dec 31 Rent $ Revenue Prepaid Revenue/ Outstanding Revenue

36 Current Liabilities Prepaid Revenue $6 000 PREPAID RENT REVENUE a/c Year 2001 Dec 31 Bal c/d $6 000 Year 2001 Dec 31 $6 000 Year 2002 Jan 1 Bal b/d $6 000 Rent Revenue $6 000 BALANCE SHEET AS AT 31 DEC 2001 Prepaid Revenue/ Outstanding Revenue

37 Balance Day Adjustments - Prepaid Revenue Definition Definition Nature of the entry Nature of the entry Distinguish the differences in adjustments between accrued revenues and prepaid revenues Distinguish the differences in adjustments between accrued revenues and prepaid revenues

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39 Practice - Accrued and Prepaid Revenues Trial Balance as at 31 August 2001 Particulars DebitCredit $ Rent Commission7 000 Adjustments 1) 1)$300 of the rent revenue was received in advance. 2) 2)The monthly commission was $700. The accounting period is from 1 July 2000 to 31 August 2001

40 Practice - Accrued and Prepaid Revenues JOURNAL Particulars Debit Credit$ 1 Rent Revenue 300 Prepaid Rent Revenue 300 (Being amount of revenue received in advance) 2 Accrued Commission Revenue Commission Revenue (Being revenue earned but not yet received)

41 1 Rent Revenue Prepaid Rent Revenue Profit & Loss for the year ended 31 Aug 2001 Prepaid Rent Revenue Balance Sheet as at 31 Aug 2001 Current Liability Prepaid Rent Rev300 Rent Revenue $ $ $ $ $ $ $ $ Rent Revenue 300Bal c/d 300 Cash at Bank Prepaid Rent Rev 300 Profit & Loss 1 200

42 2 Commission Revenue Accrued Commission Revenue Profit & Loss for the year ended 31 Aug 2001 Accrued Commission Revenue Balance Sheet as at 31 Aug 2001 Current Asset Accrued Comm Rev Rent Revenue $ $ $ $ $ $ $ $ Rent Revenue 1 400Bal c/d Cash at Bank Accrued Comm Rev Profit & Loss 8 400

43Conclusion Accrued Expenses Prepaid Expenses Accrued Revenues Prepaid Revenues Amount incurred for the accounting period but not yet paid for. Amount not yet incurred for the accounting period buy have been paid for. Amount earned for the accounting period but not yet received as cash payment. Amount not earned for the accounting period but have been paid for. Credit Entry Debit Entry Credit Entry

44Conclusion Accrued Expenses Prepaid Expenses Accrued Revenues Prepaid Revenues Dr Expense A/C Cr Accrued Expense A/C Dr Prepaid Expense A/C Cr Expense A/C Dr Accrued Revenue A/C Cr Revenue A/C Dr Revenue A/C Cr Prepaid Revenue A/C

45Conclusion Accrued Expenses Prepaid Expenses Accrued Revenues Prepaid Revenues Current Liability Current Assets Current Liability

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47 During the year of 2001, the cash book shows: During the year of 2001, the cash book shows: maintenance Expense$ 900 maintenance Expense$ 900 Selling Expense$1 200 Selling Expense$1 200 On 31 May 2001, the Balance Sheet also shows On 31 May 2001, the Balance Sheet also shows Prepaid Maintenance Expense$ 400 Prepaid Maintenance Expense$ 400 Accrued Selling expense$ 300 Accrued Selling expense$ 300 Find the amount of the expenses for the year of Find the actual amount of the expenses incurred for the year of Practice - Accrued and Prepaid Expenses

48 1 Maintenance Expense Prepaid Maintenance Expense $ $ Cash at Bank 900 Prepaid Maint Exp 400 Profit & Loss Selling Expense Accrued Selling Expense $ $ Cash at Bank Accrued Selling Exp 300 Profit & Loss1 500

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