1. Accounting Practices 501 Chapter 8 Balance Day Adjustments (Accrued expenses & Prepaid expenses) Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

2. Accrued Expenses Ch8B - Accrued & Prepaid expenses 2 Dr Wages 80,000 Additional information Wages still owing at balance date $10,000 These are expenses which have already been incurred, but have not yet been paid for or recorded Extract from Trial Balance as at 31 March Cr

3. Accrued Expenses Ch8B - Accrued & Prepaid expenses 3 Dr Wages 80,000 Additional information Wages still owing at balance date $10,000 These are expenses which have already been incurred, but have not yet been paid for or recorded Cr At balance date (31 March), we have to adjust the Wages expense (add the outstanding wages of $10,000 to get the total wages for the year) (+10,000) Extract from Trial Balance as at 31 March

4. Accrued Expenses Ch8B - Accrued & Prepaid expenses 4 Dr Wages 90,000 Additional information Wages still owing at balance date $10,000 These are expenses which have already been incurred, but have not yet been paid for or recorded Cr At balance date (31 March), we have to adjust the Wages expense (add the outstanding wages of $10,000 to get the total wages for the year) (+10,000) Extract from Trial Balance as at 31 March

5. Accrued Expenses Ch8B - Accrued & Prepaid expenses 5 Dr Wages 90,000 Additional information Wages still owing at balance date $10,000 These are expenses which have already been incurred, but have not yet been paid for or recorded Cr (+10,000) The $10,000 is still in our Bank as we have not yet paid it, but does not belong to us as we owe it to the employees. It is therefore a liability to our business Extract from Trial Balance as at 31 March

6. Accrued Expenses Ch8B - Accrued & Prepaid expenses 6 Dr Wages 90,000 Additional information Wages still owing at balance date $10,000 These are expenses which have already been incurred, but have not yet been paid for or recorded Cr (+10,000) We now create a Current Liability called Accrued Expenses Let’s do the General Journal entry (+10,000) Accrued Expenses 10,000 Extract from Trial Balance as at 31 March

7. Accrued Expenses Ch8B - Accrued & Prepaid expenses 7 Dr Wages 90,000 These are expenses which have already been incurred, but have not yet been paid for or recorded Cr (+10,000) Accrued Expenses 10,000 General Journal Date Account Titles Ref noDebitCredit 31/3 Wages expense10,000 Accrued expenses (Wages) 10,000 Being entry required to accrue wages Extract from Trial Balance as at 31 March

8. Let’s look at the financial statements Ch8B - Accrued & Prepaid expenses 8 The Wages expense will be classified as an Admin Expense in the Income Statement The Accrued expense will be classified as a Current Liability in the Balance Sheet We will only be preparing an extract from each statement showing only the relevant items

9. Ch8B - Accrued & Prepaid expenses 9 Extract from the Income Statement for the year ended …….. ………. Less Expenses Admin Expenses Wages expense$90,000 Extract from the Balance Sheet as at … ………. Current Liabilities Accrued expenses$10,000 (80,000 + 10,000)

10. Prepaid Expenses Ch8B - Accrued & Prepaid expenses 10 These are expenses that have already been paid, but relate to the following period Dr Rent 48,000 Additional information Half of the Rent amount is for the following year’s rent Cr Extract from Trial Balance as at 31 March

11. Prepaid Expenses Ch8B - Accrued & Prepaid expenses 11 These are expenses that have already been paid, but relate to the following period Dr Rent 48,000 Additional information Half of the Rent amount is for the following year’s rent Cr At balance date (31 March), we have to adjust the Rent expense (take out next year’s rent of $24,000) (-24,000 ) Extract from Trial Balance as at 31 March

12. Prepaid Expenses Ch8B - Accrued & Prepaid expenses 12 These are expenses that have already been paid, but relate to the following period Dr Rent 24,000 Additional information Half of the Rent amount is for the following year’s rent Cr (-24,000 ) Although we have already paid the $24,000, it was not yet due. If we had not paid it, it would have been in the Bank, which is a Current Asset. Extract from Trial Balance as at 31 March

13. Prepaid Expenses Ch8B - Accrued & Prepaid expenses 13 These are expenses that have already been paid, but relate to the following period Dr Rent 24,000 Additional information Half of the Rent amount is for the following year’s rent Cr (-24,000 ) We now create a Current Asset called Prepaid Expenses Let’s do the General Journal entry (+24,000) Prepaid Expenses 24,000 Extract from Trial Balance as at 31 March

14. Prepaid Expenses Ch8B - Accrued & Prepaid expenses 14 These are expenses that have already been paid, but relate to the following period Dr Rent 24,000 Cr (-24,000 ) (+24,000) Prepaid Expenses 24,000 General Journal Date Account Titles Ref noDebitCredit 31/3 Prepaid expenses (Rent)24,000 Rent expense 24,000 Being entry to record prepayment of Rent Extract from Trial Balance as at 31 March

15. Let’s look at the financial statements Ch8B - Accrued & Prepaid expenses 15 The Rent Expense will be classified as an Admin Expense in the Income Statement The Prepaid Expense will be classified as a Current Asset in the Balance Sheet We will only be preparing an extract from each statement showing only the relevant items

16. Ch8B - Accrued & Prepaid expenses 16 Extract from the Income Statement for the year ended …….. ………. Less Expenses Admin Expenses Rent Expense$24,000 Extract from the Balance Sheet as at … ………. Current Assets Prepaid Expenses$24,000 (48,000 – 24,000)