Case 5B Accrual

Accounting Adjustments
Fu, James, Mary, Reuben

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What are Accrual Accounting

Adjustments?
Accrual adjustments is the process by which
routine accruals are applied to the financial
statements. The main types of adjustments are
the expiration of assets, unearned revenues,
accrual of unrecorded expenses and accrual of
unrecorded revenues.

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Questions
1. Provide examples of accrual
accounting adjustments
2. Explain each of the adjustments

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Examples
Payments in advance; these would represent
payments that the NSW Maritime has made in
advance i.e. those in which cost has not been
recognized since the good/service has not been
provided
Can also be referred to as a prepayment
Prepayments involve a debit to the prepayments
account (under assets) and a credit to the cash
account > once the service has been provided, the
journal entries would then be adjusted to reflect this
with a debit to expenses and credit to prepayments

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Examples (cont.)
Accrued Income: this represents income that has not been
received yet but for which the service has been provided.
For instance, the end of the financial period here is 30 June
2011, however we know from the notes that payments for
trade can be made up until the end of the following month.
Therefore, a tradable good/service may have been
provided in the month of June 2011, however payment is
not expected until July 2011. Since the revenue here is
unrecorded, we would include it in the accrued revenue
account. However, the accounting equation needs to
balance. So the debit to the accrued income account,
would also mean that there must be a credit to the trade
debtors account
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Examples (cont.)
Accrued salaries, wages and on-costs: this account
shows an accrual of unrecorded expenses since the
expense has been incurred but not paid during this
financial period. Again, the end of the financial period
is 30 June.
If employees are paid on a fortnightly cycle and June
30th happens to be the 12th day of this cycle, then
the employees are yet to be paid for the 12 days of
work that they have already provided. Therefore, this
would be a credit to the accrued salaries account on
June 30 and a credit to the salary expenses account
(since it is an expense of this period)
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Examples (cont.)
Customer Advances and deposits: this is an example
of unearned revenue since the cash (or part thereof)
has been received but the good/service has not been
provided yet, so this cannot be recorded as a revenue
yet.
Since the cash has been provided before the
good/service, it is liability and recorded as a credit to
the customer advances/deposits account. This
transaction would has reflect as a debit to the cash
account, therefore balancing the accounting equation.

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