Gr 11 Accounting - Adjustments - Activity 1

Summary

In this educational chapter, Mrs. Bromagom guides junior techies through financial adjustments, focusing on expenses. She explains the treatment of prepaid and accrued expenses, emphasizing their impact on the accounting equation and financial statements. The script details the process of adjusting for rent, advertising, vehicle service, and municipal accounts, illustrating how to record these in the general journal and their effects on owner's equity. The chapter concludes with an inspiring quote, encouraging learners to embrace challenges for rewarding outcomes.

Takeaways

• 📚 The chapter focuses on adjustments in accounting, specifically for expenses.
• 💡 Prepaid expenses are subtracted from the expense account because they don't form part of the current accounting period's expenses.
• 📈 Prepaid expenses are classified as assets and are detailed in note number five of financial statements.
• 📝 Accrued expenses are added to the expense account as they are outstanding and part of the current accounting period's expenses.
• 📊 Accrued expenses are considered current liabilities and are included in trade and other payables.
• 🔢 The script provides an example of calculating adjustments for rent and advertising expenses, emphasizing the importance of considering changes over time.
• 🗓 It's crucial to know the start and end dates of the accounting period for accurate adjustments.
• 📋 The script outlines the process of preparing journal entries for adjustments and posting them to the general ledger.
• 💼 The effect of adjustments on the accounting equation is explained, showing how expenses impact assets, liabilities, and owner's equity.
• 🚗 An example of an adjustment for an unpaid vehicle service expense is given, illustrating the process of recognizing outstanding expenses.
• 🏠 The script also covers adjustments for municipal accounts, including water, electricity, rates, and taxes, and how to handle payments received after the accounting period.

Q & A

What does the term 'prepaid expense' refer to in the context of the script?

Prepaid expense refers to an expense that has been paid in advance and does not form part of the current accounting period's expenses. It should be subtracted from the expense account and is classified as an asset.

Why should prepaid expenses be subtracted from the expense account during adjustments?

Prepaid expenses should be subtracted because they do not represent expenses incurred during the current accounting period. This adjustment ensures that the expense account only reflects costs associated with the current period.

What is the classification of prepaid expenses in the financial statements?

Prepaid expenses are classified as an asset and will form part of note number five in the financial statements, which is related to trade and other receivables.

What is an 'accrued expense' and how should it be treated in the accounting adjustments?

An accrued expense is an expense that has been incurred but not yet paid. It should be added to the expense account because it forms part of the current accounting period's expenses and is classified as a current liability.

How does an accrued expense affect the accounting equation?

An accrued expense increases the expenses and the liabilities, which has a negative effect on the owner's equity according to the accounting equation: Assets = Liabilities + Owner's Equity.

What is the purpose of adjusting for prepaid and accrued expenses?

The purpose of adjusting for prepaid and accrued expenses is to ensure that the financial statements accurately reflect the expenses and financial position of the company for the accounting period, adhering to the accrual basis of accounting.

What is the significance of the accounting period in the context of the script?

The accounting period is significant because it defines the time frame for which financial activities are recorded and reported. Adjustments are made to ensure that revenues and expenses are matched to the correct accounting period.

How does the increase in rent on January 1st affect the adjustment calculation for rent expense?

The increase in rent on January 1st complicates the adjustment calculation because it changes the monthly rent amount. The script describes a method to calculate the rent expense for the period by considering the months at the original rate and the months at the increased rate.

What is the effect of the advertisement expense paid in advance on the accounting equation?

The advertisement expense paid in advance increases the prepaid expenses, which is an asset. This decreases the expenses for the current period, thus having a positive effect on the owner's equity.

What is the process for adjusting an expense that was incurred but not yet paid, as described in adjustment number B?

For an expense incurred but not yet paid, such as the vehicle service in adjustment number B, the expense account is debited, and the accrued expense account is credited. This recognizes the expense in the current period and increases the liability.

What is the final step for handling accrued expenses in the general journal after adjustments?

The final step for handling accrued expenses in the general journal is to close off the expense accounts to the profit and loss account. This involves calculating the difference between the debit and credit sides and transferring this amount to the profit and loss account.