ACC/ACF1100
Introduction to Financial Accounting
Lecture 3:
The recording process (Part 2): Trial balance and 10-column
worksheet
Balance day adjustments (Part 1)
Dr Chris Adrian - Department of Accounting
Reference:
Required readings: Financial Accounting - Reporting, Analysis and Decision Making (7th
Edition)
Chapter 2: sections 2.8
Chapter 3: sections 3.3-3.5
Week 3
1. Trial balance
2. 10 column worksheet
3. Continue with case study ‘Donny’s hairdressing business’
4. Balance day adjustments (Part 1):
• Accrued revenue
• Accrued expense
• Prepaid revenue
• Prepaid expense
2
The recording process (Part 2): Trial
balance
3
The Accounting Cycle
Inputs 1 SOURCE DOCUMENTS
During the
2 JOURNALS accounting
period
3 LEDGERS
Processing 4 TRIAL BALANCE
5 ADJUSTING JOURNAL ENTRIES
End of
6 CLOSING JOURNAL ENTRIES accounting
period
7 POST-CLOSING TRIAL BALANCE
Output 8 FINANCIAL STATEMENTS
4
Step 4 : The Trial Balance
The Trial Balance is a list of accounts and their balances at a
given time.
The primary purpose of a trial balance is to prove that:
debits = credits
in the ledger accounts after posting.
If debits and credits do not agree, the trial balance can be used to
uncover errors in journalising and posting.
5
Trial Balance - Example
Trial Balance as at 30 June 2021
Account No Account Name Debit Credit
101 Cash at Bank 46,500
155 Motor Vehicle 19,000
203 Bank Loan 15,500
301 Capital 50,000
65,500 65,500
This is called an Unadjusted Trial Balance
6
In the Exam, what happens if the trial
balance does NOT balance?
• Move on to the next question and do not spend half an hour trying to find the
error.
• If you have time at the end, re-visit the trial balance. Some possible
solutions:
• Re-add trial balance
• Did you post the correct amounts in the journal entries to the correct side
of the ledger account?
• Look for a ledger account with a balance equal to the discrepancy
• Divide discrepancy by 2 and look for an account with that balance
7
What if the trial balance does balance?
It does not necessarily mean that it is correct. Possible errors
in the trial balance could include:
• A transaction may be omitted
• The same transaction may have been recorded more than once
• A debit entry could be posted as a debit to the wrong account, e.g.
DR Cash instead of DR Accounts receivable
• Posted a wrong amount, e.g. 1,000 instead of 10,000, to both DR
and CR sides.
However, it could also be CORRECT.
8
10 Column Worksheets
An informal and internal accounting document; a worksheet
is not a permanent accounting record but rather an
accountant’s tool.
The use of a worksheet is optional, but if used provides the
basis for preparation of the financial statements in an
efficient manner.
Allows financial statements to be prepared without formally
making balance day adjustments and closing entries in the
general journal and ledger accounts.
9
10 Column Worksheets (continued)
Interim financial statements can be prepared using a
worksheet.
The formal entries can be made in the accounting records
once the worksheet is completed.
To complete a worksheet, you work from left to right,
ensuring the debit totals equal the credit totals after each
step.
10
10 Column Worksheet
CHRIS PTY LTD
Worksheet
As at 30 June 2021
Account Trial balance Adjustments Adjusted Trial Income statement Balance sheet
names balance
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash at bank
Accounts
receivable
Vehicle
Accounts
payable
Income
Wages
Expense
Capital
Drawings
Totals
Profit or (Loss)
11
Donny’s hairdressing business – July transactions
1/7 Donny contributed $20,000 cash to start a hairdressing business
1/7 Donny purchased a hairdressing equipment for $10,000 cash.
1/7 Donny took a five-year bank loan of $40,000 from Bank XYZ.
5/7 Donny provided hairdressing services to his customers for a total of $1,000 cash.
10/7 Donny purchased $6,500 worth of hairdressing supplies on credit.
15/7 Donny received a telephone bill of $250.
21/7 Donny invoiced his clients for a total of $5,000 for the hairdressing services performed.
23/7 Donny paid his telephone bill.
31/7 Donny paid his staff their monthly salary of $1,500..
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Donny’s hairdressing – General Journal
Date Particulars Debit Credit
1 July Cash 20,000
Capital 20,000
1 July Equipment 10,000
Cash 10,000
5758
1 July Cash 40,000
Bank loan 40,000
5243
5 July Cash 1,000
Service revenue 1876 1,000
10 July Hairdressing supplies 6,500
Accounts payable 6,500
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Donny’s hairdressing – General Journal
Date Particulars Debit Credit
15 July Telephone expense 250
Telephone payable 250
21 July Accounts receivable 5,000
Service revenue 5,000
5758
23 July Telephone payable 250
Cash 250
5243
31 July Wages expense 1,500
Cash 1876 1,500
14
Donny’s hairdressing – General Ledgers
Cash Equipment
1/7 Capital 20,000 1/7 Equipment 10,000 1/7 Cash 10,000
1/7 Bank loan 40,000 23/7 Telephone payable 250
5/7 Service revenue 1,000 31/7 Wages expense 1,500
31/7 Closing balance 49,250
61,000 61,000
1/8 Opening balance 49,250
Capital Bank loan
1/7 Cash 20,000 1/7 Cash 40,000
15
Donny’s hairdressing – General Ledgers
Service revenue
5/7 Cash 1,000
21/7 Accounts receivable 5,000
31/7 Closing balance 6,000
6,000 6,000
1/8 Opening balance 6,000
16
Donny’s hairdressing – General Ledgers
Hairdressing Supplies Accounts Payable
10/7 Accounts payable 10/7 Hairdressing 6,500
6,500
Accounts Receivable Telephone payable
21/7 Service revenue 31/7 Cash 250 15/7 Telephone expense
5,000 250
Telephone expense Wages expense
15/7 Telephone payable 250 31/7 Cash 1,500
17
Donny’s hairdressing – Unadjusted trial balance
Donny’s hairdressing
Unadjusted trial balance
As at 31 July 2021
Account Debit Credit
Cash 49,250
Accounts receivable 5,000
Hairdressing supplies 6,500
Equipment 10,000
Accounts payable 6,500
Bank loan 40,000
Capital 20,000
Services revenue 6,000
Telephone expense 250
Wages expense 1,500
Total 72,500 72,500
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DONNY’S HAIRDRESSING
Worksheet
As at 31 July 2021
Account names Trial balance Adjustments Adjusted Trial balance Income statement Balance sheet
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 49,250
Accounts 5,000
receivable
Hairdressing 6,500
supplies
Equipment 10,000
Accounts 6,500
payable
Bank loan 40,000
Capital 20,000
Services 6,000
revenue
Telephone 250
expense
Wages expense 1,500
Total 72,500 72,500
Profit or (Loss)
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Balance day adjustments (BDAs)
(Part 1)
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BDAs – when?
1. When?
BDAs are done at the end of the accounting period.
Accounting divides the economic life of a business into
artificial time periods (Accounting Period assumption).
BDAs – why?
A decision needs to be made :
In which accounting period should revenues and expenses
be recognised?
This decision is made based upon the concept of
Accrual Accounting.
BDAs – why?
Accrual Accounting requires:
• Revenues are recognised when earned (e.g. credit sale)
• Expenses are recognised when incurred (e.g. electricity bill)
• REGARDLESS of the underlying cash flow!
Therefore, BDAs are necessary to make sure:
• Revenues and expenses are recorded in the correct accounting
period
Adjusting Entries
NB: adjusting entries vs. general journal entries in lecture 2
• Adjusting entries record BDAs
• Adjusting entries are required each time financial
statements are prepared. Why?
In summary:
Some journal entries were recorded during the year and by balance
date, they have changed
Some things have not been recorded and should be
BDAs – why?
BDAs are required each time financial statements are
prepared. Why?
Because at date of reporting:
• revenues may have been earned but not received
• revenues received but not earned
• expenses may have been incurred but not paid
• expenses may have been paid but not incurred
Therefore, to ensure that the correct amount of profit or loss is reported for the
particular accounting period and to ensure that the correct balance of asset, liability,
and equity accounts is reported in the financial statements we need to prepare
adjusting entries. Without adjusting entries, certain items in the financial
statements will be either overstated or understated.
BDAs – what?
Four main types of adjusting entries are considered:
Accruals Prepayments
1. Accrued 3. Prepaid
Revenues revenues revenues
(an asset) (a liability)
2. Accrued 4. Prepaid
Expenses expenses expenses
(a liability) (an asset)
Accrued Revenue
(Revenue Receivable – Asset)
Revenue that has been earned in the accounting period, but has not been
received or recognised at the end of the accounting period
The revenue needs to be recorded in the period it was earned,
as does the firm’s right to receive payment.
This creates an asset account called
Accrued Revenue also known as Revenue Receivable
• Examples include interest, dividends, rental income
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Accrued Revenue
(Revenue Receivable – Asset)
Example
The company invests $1,000,000 in a term deposit on 1 May 2021. Interest at
the rate of 6% p.a. is payable on the maturity date in one year’s time.
Journalise the BDA required on 30 June 2021!
As at the balance date (30 June 2021), the company has earned interest
revenue for two months (1 May-30 June) and this needs to be recorded.
First, we need to calculate the amount of interest earned in these 2 months:
6% of $1,000,000 = ($60,000p.a. /12) * 2 = $10,000
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Accrued Revenue
(Revenue Receivable – Asset)
Journal entry:
Date Dr Cr
30-Jun-21Dr Interest receivable/accrued interest (A) 10,000
Cr Interest revenue 10,000
*This BDA entry achieves two purposes:
1. Recognising the right to receive the interest in the future – DR entry
2. Recognising interest revenue of $10,000 which we have earned – CR entry
*What if we did not journalise this BDA?
1. Asset will be understated.
2. Revenue will be understated and profit will be understated.
29
Accrued Expenses
(Expense Payable – Liability)
This is an expense that has been incurred in the accounting
period, but at balance day has not been paid or charged to
account.
The expense needs to be recorded in the period it was incurred as
does the firm’s liability for payment.
Example
• Employees are paid monthly for a total of $20,000
• The business owes half a month’s wages at the end of the accounting
period, i.e. $20,000 / 2 = $10,000.
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Accrued Expenses
(Expense Payable – Liability)
Has the $10,000 been incurred by the business? We must record the expense
that relates to the revenue recorded to 30 June and also the present obligation
of the accrued expense (also known as expense payable).
Journal Entry:
Date Dr Cr
30-Jun-21Dr Wages expense 10,000
Cr Wages payable/accrued wages (L) 10,000
*This BDA entry achieves two purposes:
1. Recognising the wages expense incurred – DR entry
2. Recognising the liability, i.e. we owe the wages to our employees – CR entry
*What if we did not journalise this BDA?
1. Expense will be understated and profit will be overstated.
2. Liability will be understated.
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Prepaid Revenue (Liability)
• Cash has been received for future revenue before it has been earned
• i.e. before the activity that earns the revenue has been performed.
• Since the revenue should not be recorded until it is earned, to the extent
it relates to goods or services yet to be rendered, a liability to perform
the activity needs to be recorded in the current period.
This liability account is called:
Prepaid Revenue and is also known as Unearned Revenue or Revenue
Received in Advance
Common examples include airline tickets, rent, magazine subscriptions, concert
tickets – all received in advance.
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Prepaid Revenue (Liability)
LIABILITY APPROACH
The cash received should be initially recorded as liability.
Dr Cash
Cr Prepaid Revenue (L)
By period end, this approach may need adjustment if some
of the revenue has been earned.
33
Prepaid Revenue (Liability)
A business received $24,000 in advance on 1 March 2021
to build a small car park for a customer.
The contract is for 6 months and the work occurs evenly
across the months. Assume that 30 June 2021 is the year
end.
We are going to:
• Complete the journal entry recording the March 1
transaction as a liability, and the BDA on 30 June.
34
A business received $24,000 in advance on 1 March 2021 to build a small car
park for a customer. The contract is for 6 months and the work occurs evenly
across the months.
Monthly revenue earned = $24,000 / 6 = $4,000/month
1 March 2021 30 June 2021
Construction Revenue
4 months 2 months
4 x $4,000 = 2 x $4,000 =
$16,000 earned $8,000 not earned
as at 30 June yet as at 30 June
35
Prepaid Revenue (Liability)
General Journal
Original entry when we received cash on 1 March 2021
Date Dr Cr
1-Mar-21Dr Cash 24,000
Cr Prepaid revenue (L) 24,000
36
Prepaid Revenue (Liability)
General Journal
BDA on 30 June 2021
Date Dr Cr
30-Jun-21Dr Prepaid revenue (L) 16,000
Cr Construction revenue 16,000
This BDA entry achieves two purposes:
1. Reducing the liability by $16,000 as we have performed the work – DR entry
2. Recognising revenue of $16,000 which we have earned as we performed the work – CR
entry
*What if we did not journalise this BDA?
1. Liability will be overstated.
2. Revenue will be understated and profit will be understated.
37
Summary
Facts
Dr. Cash 24,000 During the year
received $24,000
Cr. Prepaid Revenue (L) 24,000 (this is not BDA)
Dr. Prepaid Revenue 16,000 At balance date
earned $16,000
Cr. Construction Revenue 16,000 (this is BDA)
At balance date
Prepaid Revenue (L) =
24,000 - 16,000 = 8,000
Construction Revenue = 16,000 =
38
Prepaid Expense (Asset)
Expenses that are paid in cash before they are used or consumed
• To the extent that the expenditure is for future benefits, it should
be carried forward as an asset in the balance sheet.
• To the extent that the expenditure has been consumed, it should
be expensed.
The asset account is called:
Prepaid Expense and is also known as Prepayment.
Examples include: prepaid insurance, prepaid rent, prepaid advertising,
supplies (A)
39
Prepaid Expense (Asset)
ASSET APPROACH
The cash paid should be initially recorded as an asset
Dr Prepaid Expense (A)
Cr Cash
By period end, this approach may need adjustment if some of
the expense has been incurred.
40
Prepaid Expense (Asset)
Adrian Ltd paid $3,000 on 1 April 2021 for a 12-month
insurance coverage starting on 1 April 2021.
Assume that 30 June 2021 is the year end.
We are going to:
• Complete the journal entry recording the April 1 transaction as
an asset, and the BDA on 30 June.
41
Adrian Ltd paid $3,000 on 1 April 2021 for a 12-month insurance
coverage starting on 1 April 2021.
Monthly insurance = $3,000 / 12 = $250/month
1 April 2021 30 June 2021
Insurance Expense
3 months 9 months
3 x $250 = 9 x $250 = $2,250
$750 used not used as at 30
as at 30 June
June
42
Prepaid Expense (Asset)
General Journal
Original entry when we paid cash to purchase the insurance on 1 April 2021
Date Dr Cr
Dr Prepaid insurance
1-Apr-21 (A) 3,000
Cr Cash 3,000
43
Prepaid Expense (Asset)
General Journal
BDA on 30 June 2021
Date Dr Cr
30-Jun-21Dr Insurance expense 750
Cr Prepaid insurance (A) 750
This BDA entry achieves two purposes:
1. Recognising the insurance expense of $750 as we have used the insurance of 3 months
– DR entry
2. Reducing the asset (prepaid insurance) by $750 as we have used the insurance for 3
months – CR entry
*What if we did not journalise this BDA?
1. Expense will be understated and profit will be overstated.
2. Asset will be overstated.
44
Summary
Facts
Dr. Prepaid Insurance (A) 3,000 During the year
paid $3,000
Cr. Cash 3,000 insurance
(this is not BDA)
Dr. Insurance Expense 750 At balance date
used $750
Cr. Prepaid Insurance (A) 750 (this is BDA)
At balance date
Prepaid Insurance (A) =
3,000 – 750 = 2,250
Insurance Expense = 750 =
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Lecture example
The following is an extract of the Trial Balance as at 30 June 2022 for Tiny Tots Pty Ltd:
Dr ($) Cr ($)
Supplies 1,258
Bank loan 240,000
Prepaid insurance 3,600
Rent Revenue received in 46,000
Advance
Wages Expense 38,600
Additional information:
1. A physical count of supplies showed $346 on hand at 30 June 2022.
2. 40% of the Rent Revenue Received in Advance balance has been earned by the
30 June 2022.
3. Twelve-month Insurance premium of $3,600 was paid on 1 February 2022.
4. Wages owed amount to $3,200.
5. Borrowed $240,000 from Bank ABC on 1 March 2022 at 10% p.a. Interest to be
paid annually on 28 February.
Required:
Prepare the necessary General Journal entries required on 30 June 2022 to record
the above additional information. No narrations required.
Lecture example
Date Account Dr Cr
30 June
30 June
30 June
30 June
30 June
Lecture example
Date Account Dr Cr
30 June Supplies Expense 912
Supplies 912
(1,258 – 346 = 912)
30 June Rent Revenue Received in Advance 18,400
Rent Revenue 18,400
40% x 46,000
30 June Insurance expense 1,500
Prepaid insurance 1,500
5/12 * 3,600 = 1,500
30 June Wages Expense 3,200
Wages Payable 3,200
30 June Interest expense 8,000
Interest payable 8,000
240,000 * 10% * 4/12 = 8,000
