Gr 11 Accounting - Adjustments - Activity 2

Summary

In this educational video, Mrs. Broomercon discusses income adjustments, focusing on deferred income and accrued income. She explains the accounting treatment for income received in advance, which should be subtracted as it's not part of the current period's income, and accrued income, which should be added as it's due for the current period. The video includes practical examples, such as a customer's unsatisfactory repair service affecting fee income and rent adjustments for a tenant, Mr. Spiderman, including rent increases and repairs offset against the tenant's debt. The session concludes with a motivational quote, encouraging viewers to stay prepared and focused.

Takeaways

• 📚 The session is focused on understanding income adjustments, particularly deferred income and accrued income.
• 💡 Deferred income, also known as income received in advance, must be subtracted from the income account as it does not form part of the current period's income.
• 🔍 Deferred income is classified as a current liability and is part of note number 9, trade and other payables.
• 📈 Accrued income, which is income outstanding for the current accounting period, should be added to the income account and is classified as a current asset.
• 📝 The income account is credited for accrued income, and it forms part of note number 5, trade and other receivables.
• 📉 The accounting equation is affected by these adjustments: a decrease in income affects owner's equity negatively, and an increase in liabilities affects it positively.
• 🔧 Adjustment A involves a customer complaint about repairs, where the fee income is debited and deferred income is credited, reflecting the offset against future fees.
• 🏠 Adjustment B involves rent income from a tenant, Mr. Spiderman, and the calculation of rent for the current accounting period, considering an increase in rent.
• 🛠 Repairs paid by the tenant are considered an expense for the business and are offset against the amount owed by the tenant.
• 📊 The general journal entries are prepared to reflect these adjustments, affecting both the balance sheet and the profit and loss account.
• 💪 The speaker concludes with a motivational quote encouraging preparation, focus, and perseverance.

Q & A

What is the main focus of the activity discussed in the script?

The main focus of the activity is on income adjustments, specifically looking at income received in advance and accrued income.

Why is income received in advance subtracted from the income account?

Income received in advance is subtracted because it does not form part of the income for the current accounting period.

What is another term for income received in advance?

Another term for income received in advance is deferred income.

How is income received in advance classified in the balance sheet?

Income received in advance is classified as a current liability, which forms part of note number 9, trade and other payables.

What should be done with accrued income in the accounting process?

Accrued income should be added to the income account as it represents income that is still outstanding for the current accounting period.

How is accrued income classified in the balance sheet?

Accrued income is classified as a current asset, which forms part of note number five, trade and other receivables.

What is the purpose of preparing journal entries for adjustments?

The purpose of preparing journal entries for adjustments is to post them to the general ledger and show their effect on the accounting equation.

Can you explain the concept of adjustment number A from the script?

Adjustment number A involves a cash customer who was dissatisfied with repairs and had paid for a service. Instead of a refund, it was agreed to offset this amount against fees charged in the following month, making it an income received in advance.

What is the situation described in adjustment B, and how does it relate to the accounting period?

Adjustment B involves a tenant, Mr. Spiderman, who has been renting since the previous financial year. The focus is on the rent income for the current accounting period, which includes an increase in rent and repairs paid by the tenant that need to be offset against the amount owed.

How does the script handle the increase in rent for Mr. Spiderman's premises?

The script calculates the total rent for 11 months by considering the initial rate for three months and the increased rate for eight months, then adjusting for the outstanding rent after accounting for the repairs paid by the tenant.

What is the final step mentioned in the script for handling the adjustments?

The final step mentioned is to close off the nominal account section and balance the balance sheet account section, ensuring that all income and expenses are correctly reflected in the profit and loss account.

Outlines

00:00

📊 Income Adjustments and Accounting Period Clarification

This paragraph introduces the topic of income adjustments with a focus on deferred income, which is income received in advance and must be subtracted from the income account as it does not contribute to the current accounting period's income. The speaker, Mrs. Broomercon, explains the accounting treatment of deferred income as a current liability and accrued income as a current asset. She also outlines the process of creating journal entries for these adjustments, emphasizing the importance of knowing the start and end dates of the accounting period. An example is given where a customer's dissatisfaction with a service leads to an agreement to offset the payment against future fees, illustrating the practical application of income adjustments.

05:01

🏢 Rent Adjustments and Expense Offsetting

The second paragraph delves into the specifics of rent income adjustments and the offsetting of expenses. It discusses a scenario where a tenant, Mr. Spiderman, has been renting premises since the previous financial year, with an increase in rent from October 2020. The paragraph explains how to calculate the rent income for the current accounting period, taking into account the rent increase and the outstanding rent for one month. Additionally, it addresses the offsetting of repair expenses paid by the tenant against the rent owed. The paragraph concludes with the journal entries for these adjustments, showing how they affect the accounting equation and the balance sheet.

10:02

📝 Closing Rent and Repairs Accounts with Accrued Income

The final paragraph wraps up the discussion on rent and repair adjustments, focusing on the closure of the nominal accounts and the balance sheet. It details the process of adjusting the rent income and accrued income accounts, as well as the repairs and maintenance expense account. The paragraph provides a clear explanation of the accounting equation's impact, showing how assets, liabilities, and owner's equity are affected by these adjustments. The summary includes the journal entries for these closing adjustments, with a narration that describes the offsetting of the tenant's owed amount for repairs against the rent income. The paragraph ends with a motivational quote encouraging preparation, focus, and perseverance.

Keywords

💡Income Adjustments

Income adjustments refer to the process of modifying the recorded income to reflect the actual earnings of a specific accounting period. In the video, Mrs. Broomercon discusses focusing on income adjustments, particularly on income received in advance and accrued income, which are essential for accurately representing financial performance. For example, income received in advance is subtracted because it does not belong to the current period's income.

💡Deferred Income

Deferred income, also known as income received in advance, is income that a company has received but has not yet earned. It is treated as a liability until the service or product is provided. In the script, the example of a cash customer who paid for repairs that were not satisfactory illustrates deferred income, as the payment is to be offset against future fees.

💡Accrued Income

Accrued income is the revenue that has been earned but not yet received by the company. It is recognized in the accounting records to match the revenue with the period in which it was earned. The script mentions that accrued income should be added to the income account because it is still outstanding for the accounting period and is classified as a current asset.

💡Current Liability

A current liability is a debt or obligation that a company expects to settle within one year or less. In the context of the video, deferred income is classified as a current liability and is part of note number 9, trade and other payables, indicating that it is an obligation to be settled in the short term.

💡Current Asset

A current asset is an asset that a company expects to convert into cash or use up within one year. Accrued income is an example of a current asset, as it represents money that the company has earned but has not yet received, as explained in the script.

💡Journal Entries

Journal entries are the recording of financial transactions in the books of account. They are used to adjust the accounts and reflect the true financial position of a company. In the video, Mrs. Broomercon instructs the preparation of journal entries for adjustments, which are crucial for updating the general ledger and the accounting equation.

💡General Ledger

The general ledger is the central repository of all financial transactions of a business. It contains all the account balances and is used for the preparation of financial statements. The script describes how adjustments are posted to the general ledger, affecting the accounting equation and financial reporting.

💡Accounting Equation

The accounting equation is the fundamental formula that underlies all double-entry bookkeeping: Assets = Liabilities + Owner's Equity. It is used to show the relationship between a company's assets, liabilities, and equity. The script explains how the adjustments affect this equation, such as decreasing income and increasing liabilities or assets.

💡Rent Income

Rent income is the revenue generated from renting out property or assets. In the script, the example of Mr. Spiderman renting premises is used to illustrate how rent income is accounted for, especially when there are changes in the rental amount and outstanding rent.

💡Repairs and Maintenance

Repairs and maintenance refer to the costs associated with fixing and preserving the condition of property or assets. In the video, the script discusses an example where repairs to the rented premises are an expense that is offset against the amount owed by the tenant, affecting the profit and loss account.

💡Profit and Loss Account

The profit and loss account, also known as the income statement, is a financial statement that summarizes the revenues, costs, and expenses incurred during a specific period, reflecting the profit or loss of a business. The script explains how both rent income and repairs and maintenance are closed off to the profit and loss account after adjustments.

Highlights

Introduction to focusing on income adjustments in the context of accounting.

Explanation of income received in advance or deferred income and its treatment as a current liability.

The necessity to subtract income received in advance from the income account as it does not form part of the current accounting period's income.

Identification of accrued income as an outstanding income for the current accounting period, which should be added to the income account.

Classification of accrued income as a current asset and its inclusion in note number five, trade and other receivables.

Activity 2 involves preparing journal entries for adjustments and posting them to the general ledger.

The effect of adjustments on the accounting equation is discussed with examples.

Adjustment number A involves a cash customer's complaint and the decision to offset the unsatisfactory repair fees against future charges.

Demonstration of how to record the offset of income received in advance in the general journal and its impact on the accounting equation.

Adjustment B discusses the rent income from a tenant, Mr. Spiderman, and the increase in rent from October 2020.

Calculation of the rent income for the current accounting period considering the rent increase and outstanding amount.

Treatment of tenant-paid repairs as an expense to be offset against the amount owed by the tenant.

Journal entry for the offset of repairs and maintenance against the tenant's outstanding rent.

Recording the outstanding rent as an accrued income and its effect on the accounting equation.

Closing off the nominal account section and balancing the balance sheet account section in the general journal.

Finalizing the general journal entries with correct narrations to reflect the business transactions accurately.

Encouraging quote to stay prepared, focused, and never give up, followed by a teaser for the next activity focusing on trading stock.

Transcripts

good day junior techies i'm mrs

broomercon we are going to look at

adjustments and this time we're going to

focus on income adjustments

before we start with the activity

when i look at income adjustments we

look at

income received in advance

another word for that is deferred income

this must always be subtracted from the

income account

why

this does not form part of my income for

this accounting period

my income account will be debited

for every debit there is a credit

income received in advance or deferred

income is classified as a current

liability which will form part of note

number 9 trade and other payables

if we look at accrued income it's an

income which is still outstanding for

this accounting period

therefore it should always be added to

the income account

income account will be credited

account debited accrued income

accrued income is classified as a

current asset

which will form part of note number five

trade and other receivables

activity 2 prepare the journal entries

for the adjustments

post to the general ledger show the

effect on the counting equation so we

are going to look at adjustment number a

and

b extract from the pre-adjustment trial

balance on 50 june 2021 that is the end

of my accounting period which means the

beginning

is on the 1st of july 2020. it is

important that you always know when is

my accounting period end when does it

start

adjustment number a

a cash customer complained that repairs

to a close were not satisfactory

she had paid 510 for the service on 50

june 2021

it was agreed not to refund her this

cash

but to offset this against the fees

charge

in july 2021

so this is an income received in advance

in my general ledger we're going to

start with the opening balances and

totals so from the pre-adjustment trial

balance we have a total broad forward

why is it on the credit side because

it's an income the plus is on the credit

side

if i look at the adjustment

this should not form part of my income

for this accounting period

therefore i need to minus it

to minus i need to debit the fee income

account credited deferred income or

income received in advance

in my general journal the account which

is debited is always written first

fee income was debited so the counting

equation account debit will also be fee

income

account credit deferred income

on the counting equation exactly the

same remember another word you can use

is income received in advance

effect on the accounting equation

earnest equity minus because my income

decrease it will have a negative effect

liabilities plus

your narration in the general journal

what happened

this is an amount received in advance

next we can balance the balance sheet

account section and we can close off the

nominal account section so if we look at

deferred income

the balance carried down

means balance brought down will be 510

with fee income

this is an income which must be closed

off to the profit and loss account

this means we're going to add the credit

side

minus everything on the debit side and

the difference is the amount that will

appear in the profit and loss account

adjustment b

part of the premises are led to a tenant

mr spiderman since october 2019 now

remember our counting period ends 50

june 2021

and it starts the first of july

2020.

so this means mr spiderman's been

renting

since the previous financial year we

only care about our income

for this accounting period

now the rent increased by 1

200 per month from the 1st of october

2020 the tenant paid for 11 months which

means one month is still outstanding

now mr spiderman paid 5 000 for repairs

to the premises during june 2021.

this is the responsibility of the

business and will be offset against the

amount owed by mr

spiderman first we're going to start

with the opening balances and totals

brought forward

repairs and maintenance is an expense

rent income is an income so the total

brought forward for rent income

will appear

on the credit side

for repairs and maintenance on the debit

side

now if you look at the first part of

this adjustment

i cannot just take the amount from the

pre-adjustment trial balance and divide

that by 11.

why because the rate

increased by 1

200 per month

the rent was for three months at a

hundred percent

and for eight months it was at 100

plus

1200 per month

so how do we approach this

take out the total increased amount

to find out what is the total rent for

11 months without any increase

so if we take

the amount from the pre-adjustment

we're going to say it increased with

1200

for eight months so this is the total

amount that we're taking out

this will provide us with the rent

before the increase

now

what is it that i want to add i want to

know what is the rent outstanding after

the increase this is why we need to say

12 000

plus 1

200.

because this is our responsibility as a

business for repays

we are going to debit repairs and

maintenance we are going to add it to

our expense

account credited rent income

now if i look at

the total rate is thirteen thousand two

hundred

minus five thousand means eight thousand

two hundred is still outstanding

so to show that eight thousand two

hundred

we are going to credit rent income

an account debited accrued income

on the accounting equation

account debited repairs and maintenance

account credited

rent income effect on the accounting

equation assets zero earners equity plus

minus 5000 liabilities nothing

if we look at now what is the amount

still outstanding account debited

accrued income

account credited

rent income effect on the accounting

equation assets plus

8200 owners equity plus 8

200.

now we can close off

the nominal account section and balance

the balance sheet account section

accrued income the debit side is equal

to the credit side the difference is the

balance carried down balance brought

down

rent income is an income which is closed

off to the profit and loss account so

add everything on the credit side that

is the amount that will go to the profit

and loss account

this is our total rent income for this

accounting period

repairs and maintenance is an expense

which is closed off to the profit and

loss account so add everything on the

debit side minus everything on the

credit side

this is what will appear in your profit

and loss account as your total repairs

and maintenance for this accounting

period

when we complete the general journal

remember account which is debited is

always written first so repairs and

maintenance was debited

account credited rent income with five

thousand

narration repairs was offset against

amount owed

if we look at the second part of the

adjustment account debited accrued

income with 8200

rent income is credited with 8200

and the narration amount owed by tenant

for june remember that your narration is

basically saying what happened

thank you very much

i want to leave you with this quote be

prepared stay focused never give up

next we're going to look at activity 3

which will focus on trading stock

have a wonderful day