Gr 11 Accounting - Adjustments - Activity 1

JuniorTukkie at the University of Pretoria

5 May 202213:13

Summary

TLDRIn 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.

Outlines

00:00

📊 Accounting Adjustments for Expenses

In this paragraph, Mrs. Bromagom introduces the concept of accounting adjustments, focusing on expenses. She explains the treatment of prepaid expenses as assets that should be subtracted from the expense account since they do not constitute part of the current period's expenses. Conversely, accrued expenses, which are outstanding, should be added to the expense account as they are incurred within the accounting period. The paragraph also details how to calculate adjustments for rent paid in advance and advertising costs, emphasizing the impact of these adjustments on the accounting equation and financial statements. The narrative includes the preparation of journal entries for these adjustments and the effects on assets, liabilities, and owner's equity.

05:01

🚗 Adjusting for Outstanding Vehicle Expenses

This paragraph delves into the adjustment process for vehicle expenses that have been incurred but not yet paid, as of the end of the accounting period. Mrs. Bromagom illustrates how to record these outstanding expenses by debiting the vehicle expense account and crediting the accrued expense account. She highlights the negative impact of increased expenses on owner's equity and the necessity to close off these expenses to the profit and loss account at the end of the period. The summary includes the process of calculating the new balance for the accrued expense account and the steps involved in adjusting the general journal entries accordingly.

10:04

🏠 Municipal Account Adjustments for Unpaid Utilities

The final paragraph addresses the adjustments required for municipal accounts, specifically for water, electricity, rates, and taxes that have been consumed or incurred but not yet paid by the end of the accounting period. Mrs. Bromagom explains the process of identifying and calculating the amounts owed for these utilities, emphasizing the need to debit the respective expense accounts and credit the accrued expense account. She outlines the negative effect of these additional expenses on owner's equity and describes the procedure for closing off these expenses to the profit and loss account. The summary concludes with a calculation of the total balance for accrued expenses and a reflection on the overall impact of these adjustments on the financial statements.

Mindmap

Keywords

💡Adjustments

Adjustments refer to the modifications made to the financial accounts to reflect the true financial position of a company at the end of an accounting period. In the video, adjustments are the central theme, with a focus on how to handle various financial scenarios such as prepaid and accrued expenses. For example, the script discusses adjusting for prepaid rent and advertising expenses that have been paid in advance but are not part of the current period's expenses.

💡Expenses

Expenses are costs incurred by a business in the normal course of operations. The script explains two types of expenses: prepaid and accrued. Prepaid expenses are costs paid in advance for future services or goods, which are subtracted from the expense account as they do not represent current period expenses. Accrued expenses, on the other hand, are costs incurred but not yet paid, which are added to the expense account. The script illustrates this with examples of rent and advertising expenses.

💡Prepaid Expense

A prepaid expense is a payment made in advance for goods or services that will be received in the future. In the context of the video, the term is used to describe rent and advertising expenses that have been paid for but are not yet fully expensed. The script explains that these should be subtracted from the expense account because they do not form part of the current accounting period's expenses.

💡Accrued Expense

Accrued expenses are costs that have been incurred but not yet paid by the end of the accounting period. The script mentions that these expenses should be added to the expense account because they represent costs associated with the current period. An example given is a vehicle service expense that has been incurred but not paid by the end of June 2021.

💡Asset

In accounting, an asset is a resource with future economic benefit that a company owns or controls. The script specifies that prepaid expenses are classified as assets because they represent future benefits that have been paid for. The example of prepaid rent and advertising is used to illustrate how these assets are accounted for on the balance sheet.

💡Liability

A liability is an obligation or debt that arises during the accounting period and is expected to result in an outflow of resources. The script explains that accrued expenses are classified as current liabilities because they represent amounts owed for goods or services received but not yet paid for. The example of the municipal account, which includes water, electricity, and rates and taxes, is used to illustrate this concept.

💡General Ledger

The general ledger is the central repository of financial information for a business, containing all of the accounts and transactions. The script instructs viewers to post the adjustments to the general ledger, which is an essential step in the accounting process to ensure accurate financial reporting. The ledger records the effects of adjusting entries on various accounts.

💡Accounting Equation

The accounting equation is Assets = Liabilities + Owner's Equity, which represents the fundamental relationship between a company's assets, liabilities, and equity. The script discusses how adjustments affect this equation, such as when expenses decrease (prepaid expenses), which increases assets and has a positive effect on owner's equity, or when expenses increase (accrued expenses), which has a negative effect on owner's equity.

💡Profit and Loss Account

The profit and loss account, also known as the income statement, reports a company's revenues, expenses, and profits over a specific period. The script explains that at the end of the accounting period, expenses such as rent, advertising, vehicle expenses, water, electricity, and rates and taxes must be closed off to the profit and loss account to determine the actual expenses for the period.

💡Trial Balance

A trial balance is a report that lists the balances of all general ledger accounts at a particular time and is used to verify the accuracy of accounting entries. The script mentions the pre-adjustment trial balance, which is the starting point for identifying and calculating the necessary adjustments before the final accounts are prepared.

💡Narration

In the context of journal entries, narration is a brief description of the transaction that provides context and explanation. The script advises that if a narration is required, it should simply state what happened, such as 'amount was paid in advance' or 'expense outstanding,' which helps in understanding the rationale behind each adjusting entry.

Highlights

Introduction to the chapter focusing on adjustments in accounting.

Explanation of prepaid expenses and their treatment as an asset.

Clarification on why prepaid expenses should be subtracted from the expense account.

Discussion on the classification of prepaid expenses in financial statements.

Introduction of accrued expenses and their addition to the expense account.

Description of accrued expenses as a current liability.

Activity 1: Preparing journal entries for adjustments and their impact on the accounting equation.

Importance of knowing the start and end of the accounting period for adjustments.

Adjustment A: Dealing with rent expense paid in advance and its calculation.

Methodology for calculating the monthly rent after an increase.

Journal entry for rent expense and its effect on the accounting equation.

Adjustment of advertising expense paid in advance and its classification.

Journal entry for advertising expense and its impact on the accounting equation.

Explanation of the process for closing off expenses to the profit and loss account.

Adjustment B: Accounting for outstanding vehicle service expenses.

Journal entry for vehicle expense and its effect on the accounting equation.

Adjustment C: Dealing with municipal account expenses and their outstanding amounts.

Calculation and journal entry for water electricity and rates and taxes.

Closing off accrued expenses to the profit and loss account.

Final quote emphasizing the value of overcoming challenges for success.