Collaborate with Others to Determine the Needs of a Children S Services Program

Prepare general journal entries for balance day adjustments

Contents

Key to resources

Introduction

Adjusting journal entries and reversing journal entries

Standing journal entries

This learning guide is based on the following resource(s):
Textbook
Duncan A (2006) Introductory Accounting, National Core Accounting Publications, Bondi
Note
A new edition of this textbook was being published at the same time as this resource.
Where possible, we have provided a second Key to resources to this new edition.

Key to resources

Resource / Textbook (2006 edition)
1 / Chapter 15 ‘Balance day adjustments’, pp 1–3
2 / Chapter 15, section 15.3 Adjusting journal entries and reversing journal entries
3 / Chapter 15, self-testing exercise 1
4 / Chapter 15:

example of Joey’s Joint, pp 460–461
self-testing exercise 2

5 / Chapter 15:

example for Inez’s Essential Oils, pp 462–463
self-testing exercises 3 and 4

6 / Chapter 15:

example for Benco Toys, pp464–465
self-testing exercise 5

7 / Chapter 15, example for Blues Beach Beauty Centre, p467
8 / Chapter 15, self-testing exercise 6
9 / Chapter 15, example for Carma Industries, pp469–471
10 / Chapter 15, self-testing exercise 7 for Diva Design
11 / Chapter 15, Perpetual inventory variance to physical inventory, p472
12 / Chapter 15, Leave provisions, pp472–474
13 / Chapter 15, self-testing exercise 8
14 / Chapter 15, section 15.4 Standing journal entries
15 / Chapter 15, self -testing exercise 9
Resource / Textbook (2007 edition)
1 / Chapter 13 ‘Balance day adjustments’, p 401
2 / Chapter 13, section 13.3 Adjusting journal entries and reversing journal entries
3 / Chapter 13, self-testing exercise 1
4 / Chapter 13:

example of Joey’s Joint
self-testing exercise 2

5 / Chapter 13, pp 410 – 411:

example for Inez’s Essential Oils
self-testing exercises 3 and 4

6 / Chapter 13, pp 412 – 413:

example for Benco Toys
self-testing exercise 5

7 / Chapter 13, example for Blues Beach Beauty Centre, p 415
8 / Chapter 13, self-testing exercise 6
9 / Chapter 13, example for Carma Industries, pp 417 – 419
10 / Chapter 13, self-testing exercise 7 for Diva Design
11 / Chapter 13, Perpetual inventory variance to physical inventory, p 420
12 / Chapter 13, Leave provisions, pp 420 – 422
13 / Chapter 13, self-testing exercise 8
14 / Chapter 13, section 13.4 Standing journal entries
15 / Chapter 13, self -testing exercise 9

Introduction

Before we begin, let’s look at the theory behind balance day adjustments.

/ Go to Resource 1
The location of this and all other resources for this learning guide is found in the Key to resources at the front of the guide.

Review the theory behind balance day adjustments, in particular paragraph15.1 which sets out the difference between cash basisaccounting and accrual accounting.

Adjusting journal entries and reversing journal entries

The adjusting journal entries you are required to study are listed below.

Adjusting journal entries / Are reversing journal entries required?
Depreciation expense / No
Expenses incurred but not yet paid (accrued expenses) / Yes
Expenses paid but not yet incurred (expenses prepaid) / Yes
Income earned but not received (income accrued) / Yes
Income received but not yet earned (income received in advance) / Yes
Bad and doubtful debts / No
Perpetual inventory compared to physical inventory / No
Leave provisions / No

Note: Some of the items require reversing journal entries.

Let’s look at each item in turn.

Depreciation

The first adjustment is the depreciation adjustment. The reasons for the depreciation adjustment are the subject of separate study in this unit.

At balance day, once the amount for depreciation has been decided, the entry in the general journal is:

DebitDepreciation expense(asset name) / xxxx
CreditAccumulated depreciation (asset name) / xxxx

Depreciation expense is transferred to the profit and loss account and subsequently appears in the income statement as an administration expense. Accumulated depreciation is shown as a deduction from the asset to which it refers in the balance sheet.

/ Now go to Resource 2
Check the example for motor vehicle depreciation in the textbook. Note that the textbook mentions a provision account. The provision account is the accumulated depreciation account for each asset class.
/ Now go to Resource 3
Check your answer at the back of the chapter.

Expenses incurred but not yet paid

Expenses incurred but not yet paid can also be referred to as accruedexpenses or expenses accrued.

At balance day there can be a number of expenses incurred but not yet paid.

Examples are advertising and wages. Remember, the principle is the same for any expense which has been incurred but not yet paid at balance day.

The general journal entry is:

Debit / Expense(Any) / xxxx
CreditAccrued expenses / xxxx

Important points to note:

The expense is increasedby the amount of the accrual before the transfer to the profit and loss account of the increased amount.
The accrued expense account is shown as a current liability in the balance sheet.
The entry is reversed on the first day of the following financial year, ie:

DebitAccrued expenses / xxxx
CreditExpense(any) / xxxx

There is no adjustment to any GST amounts.

/ Now go to Resource 4

Expenses paid but not yet incurred

These expenses are also referred to as expenses prepaid or prepayments.

Payments for some expenses are often required to be made in advance. Examples include insurance and rent. Remember, the same principle applies to any expense paid in advance at balance date:

The general journal entry is:

Debit / Expenses prepaid / xxxx
CreditExpense(any) / xxxx

Important points to note:

The expense is decreasedby the amount of the prepayment before the transfer to the profit and loss account of the reduced amount.
The expense prepaid account is shown as a current asset in the balance sheet.
The entry is reversed on the first day of the following financial year, ie:

DebitExpense(any) / xxxx
CreditExpenses prepaid / xxxx

There is no adjustment to any GST amounts.

/ Now go to Resource 5

Income earned but not received

This is otherwise referred to as income accrued.

With accrued expenses the expense is incurred but not paid at balance day. Similarly income can be earned but not received at balance day. A common example is interest. However, the principles apply to any income earned but not received at balance day.

The general journal entry is:

Debit / Income accrued / xxxx
CreditIncome(any) / xxxx

Important points to note:

The income account is increasedby the amount of the income due before the transfer to the profit and loss account of the increased amount.
The income accrued account is shown as a current asset in the balance sheet.
The entry is reversed on the first day of the following financial year, ie:

DebitIncome(any) / xxxx
CreditIncome accrued / xxxx

There are no adjustments to any GST amounts.

/ Now go to Resource 6

Income received but not yet earned

Income received but not yet earned is income received in advance.

With expenses prepaid the expense is paid but not yet due at balance day. Similarly, income can be received but not yet due at balance day. Rent income is the most common example. However, the principle applies to any income received in advance at balance day:

The general journal entry is:

Debit / Income(any) / xxxx
CreditIncome received in advance / xxx

Important points to note:

The income account is decreasedby the amount of the income received in advance before the transfer to the profit and loss account of the reduced amount.
The income received in advance account is shown as a current liability in the balance sheet.
The entry is reversed on the first day of the following financial year, ie:

DebitIncome received in advance / xxxx
CreditIncome (any) / xxxx

There is no adjustment to any GST amounts.

/ Now go to Resource 7

Note that in the example for BluesBeach Beauty Centre the amount of income received in advance is $5000.

/ Now go to Resource 8

Remember:With expenses accrued, expenses prepaid, income accrued and income received in advance, the balance day general journal entry is reversed on the first day of the next financial year.

Bad debts

If an outstanding accounts receivable (debtor) does not pay, the amount outstanding should be written off as a bad debt. If the original transaction involved GST then 1/11th of the amount of the bad debt should be written off to the original GST account and not to bad debts.

If the original sale on credit was for $400 plus 10% GST then the accounting entry to record that sale would be:

Debit / Accounts receivable / $440
CreditSales / $400
CreditGST collected* / $40

*or GST clearing account

If that debt could not be collected and the amount had to be written off, the general journal entry would be:

Debit / Bad debt / $400
Debit / GST collected / $40
CreditAccounts receivable / $440

Doubtful debts

A business will know from past experience that some of the credit sales it makes during the year will not be collected. In order for the accounting period to reflect the loss in the same period as the income, an amount may be set aside to reflect the expected loss.

The balance day adjustment entry to record this is:

Debit / Doubtful debts / xxxx
CreditAllowance for doubtful debts / *xxxx

*The textbook uses the terminology provision for doubtful debts. Recent changes to accounting standards, however, require the change of name to allowance for doubtful debts.

Example

(a)Establishing the allowance

Assuming a business has, at the end of 20x6, an accounts receivable balance of $24000 and is creating an allowance for doubtful debts for the first time of 5% ($1200),the required entry is:

Debit / Doubtful debts / $1200
CreditAllowance for doubtful debts / $1200

Doubtful debts will be transferred to the profit and loss account and will be shown in the income statement as a financial expense. Allowance for doubtful debts will be shown in the balance sheet as a deduction from the total of accounts receivable.

(b)Adjusting the allowance

If at the end of 20x7 the above business has an accounts receivable balance of $30000 and wishes to maintain the allowance at 5% then the entry is:

Debit / Doubtful debts / $300
CreditAllowance for doubtful debts / $300

That is, the adjustment required is $1500 (5% of $30000) less the existing balance of $1200.

/ Now go to Resource 9

Note: in the example for Carma Industries, in the second year (20x7) the bad debt is written off first before calculating the adjustment to the allowance for doubtful debts.

/ Now go to Resource 10

Note that there is an error in the textbook: the amount for bad debts in the ledger account and the income statement should be $850 and not $935.

Note that the method of writing off bad debts and showing the bad debts expense in the profit and loss account is known as the direct method. Management may decide to write off the bad debts to the allowance for doubtful debts as the allowance was created in expectation of a bad debt. The entry would be:

Debit / Allowance for doubtful debts / xxxx
CreditBad debts / xxxx

In this case the bad debts will not appear as an expense in the profit and loss account.

However, the allowance for doubtful debts will need to be increased(and therefore doubtful debts expense increased) in the year of the write off so that the effect on profits is the same.

Perpetual inventory compared to physical inventory

/ Now go to Resource 11

Note the example for Nuts and Bolts. In this example the physical count is less than the value of inventory shown in the general ledger.

If the physical count is greater than the inventory balance in the general ledger (eg in the case of Nuts and Bolts the physical count was $92020), then the adjustment required would be:

Debit / Inventory / $500
CreditPerpetual inventory variance / $500

Perpetual inventory variance is then transferred to cost of goods sold. In the above example the entry would be:

Debit / Perpetual inventory variance / $500
CreditCost of goods sold / $500

Leave provisions

/ Now go to Resource 12

Check the discussion in the textbook and particularly the example for Kitty Hawk Holiday Camp. Note that when a payment is made for leave taken, the debit entry is made to the provision account. In the example, $19200 for annual leave paid is shown as a debit in the provision for annual leave and $1800 for sick leave paid is shown as a debit in the provision for sick leave.

In the income statement the amounts shown in the profit and loss extract in the textbook example would generally be shown under administrative expenses. In the balance sheet the provision accounts created would generally be shown as a current liability.

However, if the liability is not expected to be paid within the next 12 months, it would be shown as a non-current liability. Provision for long service leave is an example of a provision that could contain both current and non-current components.

/ Now go to Resource 13

Note that, in the solution to self-testing exercise 8,the amounts shown for workings in two of the general journals are incorrect.

The working for the annual leave expense of $44400 should be:

52000 – 46000 + 38400

The working for the sick leave expense of $4400 should be:

4800 – 4000 + 3600

Standing journal entries

We have just looked at preparing general journal entries for balance day adjustments. An alternative to general journal entries for balance day adjustments is the standing journal.

/ Now go to Resource 14

Check the commentary in the textbook and compare the entries for expenses prepaid and income received in advance using the standing journal with the same entries using the general journal.

/ Now go to Resource 15

Preparing general journal entries for balance day adjustments1