1. Methods of Accounting
•Cash Accounting
•Accrual Accounting
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2. Cash Accounting
• Transactions recorded only when
cash is received or paid
– Credit sales and purchases recorded
only when cash received from
customer or paid to supplier
• Does not adhere to matching
principle
• Does not comply with ATO
2

3. Accrual Accounting
Accrual accounting
recognises transactions and events when
revenues are earned and expenses are
incurred.
Eg interest earned at the end of the
accounting period will be recorded (though
still not received) – application of the
matching principle.
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4. Recognising revenue:
although cash may not have been
received, business records recognise that
the revenue has been earned.
Realising revenue:
occurs when cash is received and
recorded by business for the revenue
previously recognised.
4

5. Balance Day Adjustments
• Allows matching principle to be carried
out
• Adjustment entries facilitate a better
matching of revenues and expenses
• Ensures a more accurate profit figure for
the period
• Essential – final reports are a basis for
future decisions
• Information in reports are of greater
relevance and more reliable
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6. • Adjustments are carried out at balance
day before revenues and expenses are
closed to P&L summary a/c
Balance day adjustments are general
journal entries made as at balance day in
order to compare (match) the revenues
and expenses accurately so that the profit
(loss) can be determined.
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7. There are numerous balance day
adjustments. Four will be covered in
this unit:
• Prepaid expenses
• Accrued expenses
• Unearned revenues
• Accrued revenues
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8. Prepaid Expenses
Prepaid expenses
are the portion of an expense that has been
paid by a business in one accounting period
but will be incurred (used up) in a future
accounting period.
eg
– Insurance
– Subscriptions
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9. The business paid $1 200 for a yearly
subscription to a trade journal at the
beginning of March. The Subscription
a/c (an expense) would appear as:
General Ledger
Date Particulars Debit Credit Balance
Subscription a/c
Mar 1 Bank 1 200 1 200Dr
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10. • The subscription is for one year and will be
renewed in March of 2008
• Balance day is 30 June 2007
• Any part of the subscription past this date has
been prepaid and relates to the next accounting
period
• The prepaid amount is $800 (8 months)
• The account, on balance day, must recognise
this prepaid amount as belonging to the next
General Journal
accounting period
– General journal entry is required: Debit
Date Particulars Credit
Jun 30 Prepaid Expense 800
Subscription a/c 800
(Balance day adjustment)
10

11. • This entry permits:
– The necessary decrease in the
Subscription a/c by the prepaid
amount and
– The temporary asset account Prepaid
Expense is created to reflect the $800
paid in advance. (this is an asset
because the business is owed the
service of the subscription)
11

12. General Ledger
Date Particulars Debit Credit Balance
Prepaid Expense a/c Balance Sheet
Jun 30 Subscription 800 800Dr
Subscription a/c
Mar 1 Bank 1 200 1 200Dr
Jun 30 Prepaid Expense 800 400Dr
Closed to P&L
Summary a/c 12

13. • The very next day – July 1 a reversing
entry is required to allow:
– the reversal of the balance day adjustment
entries so that revenue and expenses are
returned to the pre-adjusted state and
– the closure of the temporary asset or liability
accounts that were created on balance day to
adjust the revenue and expense accounts for
accrual accounting purposes.
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14. General Journal
Date Particulars Debit Credit
Jul 1 Subscription 800
Prepaid Expense 800
(Reversing entry)
14

15. General Ledger A/c now closed
Date Particulars Debit Credit Balance
$800
Prepaid Expense a/c
returned to
Jun 30 Subscription 800 800Dr
a/c –
Jul 1 Subscription 800 0 represents
Subscription a/c the
Mar 1 Bank 1 200 1 200Dr subscription
Jun 30 Prepaid Expense 800 400Dr amount
P&L Summary 400 0 which will be
Jul 1 Prepaid Expense 800 800Dr consumed in
this current
period.
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16. Accrued Expenses
Accrued expenses are costs incurred by a
business in the current accounting period
that have not yet been paid
eg
– Rent
– Wages
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17. During the 2006/2007 financial year
the business has paid $25 500 in rent.
On balance day rent is owing of $1 200
but will not be paid until the following
week.
General Ledger
Date Particulars Debit Credit Balance
Rent Expense a/c
Jun 30 Entries to date 25 500 25 500Dr
17

18. • On balance day rent is owing of $1 200 but will not be paid until the
following week.
• According to the principles of accrual accounting, the expense of $1
200 for rent owing must be included in the profit calculation event
though it has not been paid.
• Rent needs to be adjusted to show the total expense incurred for rent
in the accounting period.
– General journal entry is required:
General Journal
Date Particulars Debit Credit
Jun 30 Rent Expense 1 200
Accrued Expense 1 200
(Balance day adjustment)
18

19. • This entry permits:
– The necessary increase in the Rent a/c
by $1 200 because the amount has
been incurred in the current
accounting period and
– The temporary liability account
Accrued Expense is created to reflect
the $1 200 that is owing by the
business. (this is a liability because the
business owes the amount for rent in
this accounting period.)
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20. General Ledger
Date Particulars Debit Credit Balance Balance
Sheet
Accrued Expense a/c
Jun 30 Rent Expense 1 200 1 200Cr
Rent Expense a/c
Jun 30 Entries to date 25 500 25 500Dr Closed to P&L
Summary a/c
Accrued Expense 1 200 26 700Dr
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21. • The very next day – July 1 a reversing
entry is required.
General Journal
Date Particulars Debit Credit
Jul 1 Accrued Expense 1 200
Rent Expense 1 200
(Reversing entry)
21

22. A/c now
closed
General Ledger $1 200
Date Particulars Debit Credit Balance returned to a/
Accrued Expense a/c c – represents
Jun 30 Rent Expense 1 200 1 200Cr the rent
Rent Expense 1 200 0 amount which
Rent Expense a/c will be paid in
this current
Jun 30 Entries to date 25 500 25 500Dr
period but
Accrued Expense 1 200 26 700Dr
was owed in
P&L Summary 26 700 0 the previous
Jul 1 Accrued Expense 1 200 1 200Cr period.
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23. Unearned Revenues
Unearned Revenues are income that has been
received by a business and recorded in the current
accounting period but will not be earned until a
future accounting period.
eg
– Rent Revenue
23

24. The business received 3 months rent
on 30 April 2007 of $3 000.
General Ledger
Date Particulars Debit Credit Balance
Rent Revenue a/c
Apr 30 Bank 3 000 3 000Cr
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25. • On balance day, 30 June 2007, the business must
account for the rent that was received in advance.
• This amount relates to the next accounting period.
• Rent Revenue a/c needs to be adjusted to demonstrate
that the one month’s rent for July (paid in April)
represents a revenue that will be earned in the next
accounting period.
• One month’s rent is $1 000
General General journal entry is required:
– Journal
Date Particulars Debit Credit
Jun 30 Rent Revenue 1 000
Unearned Revenue 1 000
(Balance day adjustment)
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26. • This entry permits:
– The decrease in the rent revenue account of $1
000 because only $2 000 has been earned in
the current accounting period
– The temporary liability account Unearned
Revenue is created to reflect the $1 000 that
has been received but not yet earned. (this is a
liability because the business owes the tenant
the use of the premises.)
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27. Balance
Sheet
General Ledger
Date Particulars Debit Credit Balance
Unearned Revenue a/c
Jun 30 Rent Revenue 1 000 1 000Cr
Closed to
P&L
Rent Revenue a/c
Summary a/
Apr 1 Bank 3 000 3 000Cr c
Unearned Revenue 1 000 2 000Cr
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28. • The very next day – July 1 a reversing
entry is required.
General Journal
Date Particulars Debit Credit
Jul 1 Unearned Revenue 1 000
Rent Revenue 1 000
(Reversing entry)
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29. A/c now
closed
General Ledger $1 000
Date Particulars Debit Credit Balance returned to a/
Unearned Revenue a/c c – represents
Jun 30 Rent Revenue 1 000 1 000Cr the rent
Jul 1 Rent Revenue 1 000 0 revenue
amount which
Rent Revenue a/c
will be earned
Apr 1 Bank 3 000 3 000Cr
in this current
Jun 30 Unearned Revenue 1 000 2 000Cr period but
P&L Summary 2 000 0 was received
Jul 1 Unearned Revenue 1 000 1 000Cr in the
previous
period.
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30. Accrued Revenues
Accrued Revenues are revenues that have been
earned in the current financial period but not yet
received
eg
– Commission Revenue
– Interest Revenue
– Rent Revenue
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31. The business has earned a 5%
commission on sales amounting to
$1000. On 30 June the commission had
still to be received
General Ledger
Date Particulars Debit Credit Balance
Commission Revenue a/c
31

32. • On balance day commission is still to be received and will
likely be received in the next accounting period.
• According to the principles of accrual accounting, the
revenue of $50 for commission revenue must be included
in the profit calculation even though it has not been
received.
• General Journal Revenue a/c needs to be adjusted to show
The Commission
Datetotal revenue earned in the accounting period. Credit
the Particulars Debit
– General journal entry is required:
Jun 30 Accrued Revenue 50
Commission Revenue 50
(Balance day adjustment)
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33. • This entry permits:
– The necessary increase in the
Commission Revenue a/c by $50
because the amount has been earned
in the current accounting period and
– The temporary asset account Accrued
Revenue is created to reflect the $50
owing to the business.
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34. General Ledger
Date Particulars Debit Credit Balance Balance
Accrued Revenue a/c
Sheet
Jun 30 Commission Revenue 50 50Dr
Commission Revenue a/c Closed to
Jun 30 Accrued Revenue 50 50Cr P&L
Summary a/
c
34

35. • The very next day – July 1 a reversing
entry is required.
General Journal
Date Particulars Debit Credit
Jul 1 Commission Revenue 50
Accrued Revenue 50
(Reversing entry)
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36. A/c now
closed
General Ledger
$50 returned to
a/c –
represents the
Date Particulars Debit Credit Balance commission
Accrued Revenue a/c amount which
will be received
Jun 30 Commission Revenue 50 50Dr in this current
Commission Revenue 50 0 period but was
earned in the
Commission Revenue a/c previous
period.
Jun 30 Accrued Revenue 50 50Cr
P&L Summary 50 0
Jul 1 Accrued Revenue 50 50Dr
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