Gr 11 Accounting - Adjustments - Activity 1
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
- π The chapter focuses on adjustments in accounting, specifically for expenses.
- π‘ Prepaid expenses are subtracted from the expense account because they don't form part of the current accounting period's expenses.
- π Prepaid expenses are classified as assets and are detailed in note number five of financial statements.
- π Accrued expenses are added to the expense account as they are outstanding and part of the current accounting period's expenses.
- π Accrued expenses are considered current liabilities and are included in trade and other payables.
- π’ The script provides an example of calculating adjustments for rent and advertising expenses, emphasizing the importance of considering changes over time.
- π It's crucial to know the start and end dates of the accounting period for accurate adjustments.
- π The script outlines the process of preparing journal entries for adjustments and posting them to the general ledger.
- πΌ The effect of adjustments on the accounting equation is explained, showing how expenses impact assets, liabilities, and owner's equity.
- π An example of an adjustment for an unpaid vehicle service expense is given, illustrating the process of recognizing outstanding expenses.
- π 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
π 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.
π 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.
π 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
π‘Adjustments
π‘Expenses
π‘Prepaid Expense
π‘Accrued Expense
π‘Asset
π‘Liability
π‘General Ledger
π‘Accounting Equation
π‘Profit and Loss Account
π‘Trial Balance
π‘Narration
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.
Transcripts
good day junior techies i'm mrs bromagom
we are going to focus in this chapter on
adjustments
we're first going to look at
expenses
if i look at expenses prepaid expense
means expense paid in advance
this should always be subtracted from
the expense account why
it doesn't form part of my expense for
this accounting period
and therefore it needs to be subtracted
so my expense account will be credited
account debited prepaid expense and
prepaid expense is classified as an
asset
which will form part of note number five
in your financial statements now if you
remember note number five is your trade
and other receivables
if i look at accrued expense
accrued expense is an expense which is
still outstanding and this should always
be added to your expense account why
because this forms part of your expense
for this accounting period
my expense account will be debited
account credited accrued expense accrued
expense is classified as a current
liability
and will form part of your trade and
other payables
if you look at activity 1
prepare the journal entries for the
adjustments post to the general ledger
and show the effect on the accounting
equation so we are going to look at all
of these adjustments
now before we start with the activity
always know when does my accounting
period end and when does it start
if my counting period ends 50 june 2021
it means it starts on the 1st of july
2020
if we look now at adjustment number a
the following has been paid in advance
ranked for one month and advertisement
480.
so before we look at the adjustments we
are going to start with the totals
brought forward from the pre-adjustment
trial balance
if i look at
rent expense and advertising
both is classified as an expense
therefore the total brought forward will
appear on the debit side
now focusing on the adjustment
ranked for one month
the rent was increased by 10
on the 1st of january 2021
now this makes it a little bit more
complicated
i cannot take the amount from the
pre-adjustment trial balance and divide
it by 13 to find the monthly rent
in order for me to know how much must be
taken out
why because the rent increased by 10
on the 1st of january
now there are different ways in how you
can get to exactly the same answer this
is my approach if you look on the
timeline
for six months the rent was at a hundred
percent
for seven months it was at a hundred
plus ten percent
i'm going to say six times one hundred
seven times hundred and ten because for
seven months it was at a hundred 110
and then i'm going to add those two
together
now what is it that i want to calculate
i want to know what was the rent
after the increase because that's the
amount that should be taken out
this is why i'm going to take the amount
from the pre-adjustment trial balance
and i'm going to say times 110
divided by
1370 and this will provide me with the
amount after the increase
so when completing this adjustment now
because this is
ranked which
was paid in advance we are going to
take it out of my expense account
so rent expense will be credited
account debited prepaid expense
when completing the general journal
the account which is debited must always
be written first so the account debited
was prepaid expense
account credited rent expense
effect on the accounting equation assets
plus
because my rent expense because my
expense decrease
it will have a positive effect on the
owner's equity
if we look at the advertisement there's
no calculation involved here they set
you an advertisement 480 which will only
appear in the newspaper in july 2021
which is outside of my accounting period
advertising because it's outside of my
accounting period i need to subtract it
it doesn't form part of my expense for
this accounting period so advertising is
credited
account debited prepaid expense
again when completing the general
journal account which is debited is
always written first so prepaid expense
is debited on the accounting equation it
will also be debited
account credited
advertising effect on the accounting
equation
assets plus owner's equity plus because
my expense decrease it will have a
positive effect on the owner's equity
in my general journal
i am going to
add for rent expense and advertising
and i'm going to save the total
prepaid expense
9 thousand two hundred and eighteen
prepaid expense is in the balance sheet
account section
so therefore we need to calculate our
new balance
take the debit side minus the credit
side the difference is the balance
carried down balance brought down
rent expense is an expense at the end of
the accounting period this must be
closed off to the profit and loss
account take the debit side
minus the credit side the difference
will go to the profit and loss account
advertising is an expense which is close
off to the profit and loss account
the same what we've done with rent
expense take the debit
minus the credit the difference will go
to the profit and loss account
and this is my actual expense for this
accounting period
in my general journal
if you are required to write the
narration
all you need to do
is simply say what happened
amount was paid in advance
adjustment number b
the vehicle was serviced during june
2021
the count of
1405 has not yet been paid now anything
that is still outstanding must be added
to our expense for this accounting
period
we're going to start with the totals
from
the pre-adjustment trial balance
vehicle expense is an expense so on the
debit side we will have the total
brought forward
the
1405 which is still outstanding must be
added to the expense account so vehicle
expense is debited
account credited accrued expense
in my general journal account which is
debited is always written first so
vehicle expense was debited
in my accounting equation i'm going to
have exactly the same
account credited accrued expense
effect on the accounting equation
owners equity minus liabilities plus
why does my owner's equity decrease
because my expense increased it will
have a
negative effect on the owner's equity
my narration for my general journal
what happened expense outstanding
vehicle expense is an expense so at the
end of the accounting period we need to
close it off where do we close it off to
the profit and loss account so take the
debit side and add it together minus the
credit side and that is the amount that
will appear in your profit and loss
account
we're not going to close off accrued
expense yet because there was another
adjustment
adjustment number c
the municipal account from west
municipality
from west my apologies
for june 2021 4700
was only received on the 2nd of july
2021 which is outside of our accounting
period
this included the water electricity
account 2
300 and the rest is for rates and taxes
make the necessary adjustment
if we look at the totals brought forward
water electricity
and rates and taxes is an expense so the
total brought forward will appear on the
debit side
this is an expense which is still
outstanding which means it should be
added to the expense account
therefore water electricity is debited
with 2
300.
now with rates and taxes we need to
calculate what is the amount that was
owed
or is owed for rates and taxes
if the total amount is 4700
and 2300 is for water electricity it
means the difference which is 2400
is for rates and taxes
account credited accrued expense
when we complete the general journal
account which is debited is always
written first
account debited
water electricity and rates and taxes
we're going to do exactly the same for
the counting equation
account credited
accrued expense
effect on the accounting equation
owner's equity minus
liabilities plus
because our expense increased it has a
negative effect on the owner's equity
so if we now look at the general journal
the total accrued expense
is four thousand seven hundred so we're
adding those two together
and now we're simply going to say
the numeration what happened expenses
outstanding
we can now calculate the total balance
for crude expense
at the credit side the difference
is the balance carried down means
balance brought down
water electricity is an expense which is
closed off to the profit and losses
count so add the debit side
minus everything on the credit side so
it means that is the total that will
appear in your profit and loss account
rates and taxes exactly the same it's an
expense which is closed off to the
profit and loss account
thank you very much next we're going to
look at activity 2 where we're going to
focus on income adjustments
i want to leave you with this quote
difficult roads lead to beautiful
destinations have a wonderful day
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