ACCOUNTING ADJUSTMENT ENTRIES
2
types of Accounting adjustment in the accounting field. They are Accruals and Deferrals.
A.
ACCRUALS (Accrual basis or Merchantile law)
An
accrual is an expense or revenue (income) incurred in an accounting period for
those business transactions which are not actually having an invoice or payment
changed in hands by end of that accounting period.
An
expenses recognized before cash is paid, and revenue (income) recognized before
cash is received.
1. Accrued Expenses
An
expense that have been incurred, but not yet paid for. Every adjusting entry
for accrued expense is as :-
|
Dr.
Expense Cr.
Expense payable (outstanding) |
Accrued
expense is current liabilities. These expenses include Payroll payable
(Salaries, PF, ESI, DA, Conveyance, HRA, Bonus, Incentives or Increments,
Arrears), Taxes (Professional tax, GST, etc.), Rent, Interest, Utilities, and
Commission payable, etc.
Impacts on financial statements if failure to record an
outstanding expenses :-
(a)
Liabilities will be understated
(b)
Expenses will be understated
(c) Net
profit will be overstated
2. Accrued Income
The
income which has been earned (from investments), but not yet received the
payment (which entitled by the party) in same period, will be receive that
payment in subsequent period. Income must be recorded in the
accounting period in which it is earned irrespective of when the payment is
received. Thus, accrued income must be recognized in the accounting
period in which it arises rather than in the subsequent period in which it will
be receive the payment for entitled by the party. These include :-
(a)
Interest (on investment) earned, but not received,
(b)
Rent earned, but not collected,
(c)
commission due to being received, etc.
|
Dr.
Income receivable (C.A) Cr.
Income (P/L) |
|
Dr.
Customer / Debtor Cr.
Income receivable |
|
Dr.
Bank / Cash Cr.
Customer / Debtor |
Impacts on financial statements if failure to record an
accrued income :-
(a) Assets
will be understated on the balance sheet
(b) Income
will be understated on the Income statement
(c) Net
profit will be understated on the Income statement
B.
DEFERRALS
A
deferral (delay) refers to an amount that was paid or received, but the amount
cannot be reported on the current Income statement (Profit and Loss A/c) since
it will be an expense or revenue of a future accounting period. In simple
terms, expenses recognized after cash is paid, and revenue (income) recognized
after cash is received.
1. Prepaid / Deferred expenses
Prepaid
expense is an asset which is paid out to a counterpart for goods and / or
services to be received in a future accounting period. In prepaid expense, the
early payment is accompanied by a related recognised expense in the subsequent
accounting period. These are include :-
(a)
Supplies / Stationary
(b)
Insurance
(c)
Property tax, etc.
|
Dr.
Prepaid expenses (C.A) Cr.
Bank (C.A) |
|
Dr.
Expense (P/L) Cr.
Prepaid expenses (C.A) |
It concludes
that if there is any statutory payments (taxes) which are available for input
tax credit, should exclude while calculation of equated periodic amount to
transfer from prepaid expenses to respective expense account at each end of the
period.
2. Income received in advance
(Deferred revenue)
The
payment of revenue (income) received from a counterpart for goods and / or
services that are yet to be delivered in a future accounting periods is known
as Income received in advance or Deferred revenue or Un-earned revenue. These
include :-
(a)
Rail reservation tickets
(b)
Sports tickets
(c)
Subscriptions
(d)
Tuition fee, etc.
|
Dr.
Bank (C.A) Cr.
Income received
in advance (C.L) |
|
Dr.
Income received
in advance (C.L) Cr.
Income (P/L) |
It
concluded that we should not recognize as revenue until the Goods and / or
services are delivered by us to counterparty, and treat the realized revenue
(payment received) as deferred revenue until Goods and / or services of
respective period is delivered by us to counterparty.
Note
:-
------------------------------- The end -------------------------
Thank you,
Chandra Sekhar Reddy
Author and Sole proprietor,
SCR Gallery
Website : https://www.scrgallery.com
Blogger : https://scrgalleryindia.blogspot.com
E-mail : scr@scrgallery.com
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