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AF2108 Week 1-4 Student

The document discusses key accounting concepts including the basic accounting equation, components of financial statements, classification of accounts, and examples of adjusting entries for prepaid expenses, depreciation, unearned revenue, accrued expenses, and accounts receivable. It provides examples to illustrate accounting entries for deferrals and accruals across different reporting periods to properly record revenues, expenses, assets, and liabilities according to accrual basis accounting.

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w.lee
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44 views

AF2108 Week 1-4 Student

The document discusses key accounting concepts including the basic accounting equation, components of financial statements, classification of accounts, and examples of adjusting entries for prepaid expenses, depreciation, unearned revenue, accrued expenses, and accounts receivable. It provides examples to illustrate accounting entries for deferrals and accruals across different reporting periods to properly record revenues, expenses, assets, and liabilities according to accrual basis accounting.

Uploaded by

w.lee
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Chapter 1 & Chapter 2

Basic Accounting Equation

_assets______________ = _liability__________ + _equity__________

What are the components of financial statements?


1__income statement______ 2__retained earning statement______
3___statement of financial positions______ 4__statement of cash flow___

_statement of financial position_____ presents a snapshot at a point in time.

_income statement_____ , _retained earning statement___ and _statement of cash


flow___ measure the operating activities for a period of time.

Asset section of the Statement of Financial Positions (SFP) may consists of Current

assets , Property Plant and Equipment, Long-term investments, Intangible assets _.

The two components of Equity are __retailed earning______ and __share capital___.

Liabilities may classify into __current liability____ and __Long-term liability____.


Net Income = __revenues_____ - ___expenses____.

Opening (Beginning) retained earnings + __net income____ - __dividends____ =


closing (ending)retained earnings.
Chapter 3

Accounting equation for period one (no beginning retained earning):


Assets = Liabilities + Equity
Assets = Liabilities + Capital + (Net income – Dividend) ( =Retained Earning)
Since Net income = Revenue – Expenses, therefore
Assets + _expenses_+ _dividend__= Liabilities + _revenue__+ Capital

Normally,__assets___, __expenses__ and __dividend____ with debit balances.

Normally, _liabilities______, ___revenues_____ and ___share capital___ with credit


balance.

When __assets____, __dividend___ or __expenses____ increase, we debit the


corresponding ledger accounts. If those items decrease, we __credit____ the accounts.

When __liability____, ____revenue_____ or __share capital____ increase, we credit


the corresponding ledger accounts. If those items decrease, we _debit___ the
accounts.

__The Journal__ is the book of original entry. Transactions recorded in


chronological order.

__The ledger___ contains the entire group of accounts maintained by a company.


Chapter 4
Prepaid Expense is classified as ___current assets____ in the statement of financial
position / income statement (underline the correct item).
Unearned Revenue is classified as __current liability____ in the statement of financial
postion/ income statement (underline the correct item).
Example 1
If $1200 was paid on 1 July 2019 for insurance coverage for one year and the
company prepared the financial statement on a quarterly basis, the amount of prepaid
insurance as at 30 September 2019 = __$900____, the insurance expense for 1 July to
30 September 2019 = __$300__.

If the journal entries made on 1 July 2019:


Dr Prepaid insurance 1200
Cr Cash 1200
The adjusting entries made on 30 September 2019:
Dr _____insurance expense 300_________
Cr __prepaid insurance 300_________

Example 2
A machine was purchased on 1 January 2018 for $10,000. It is expected that the
machine can be used for 5 years.
Please complete the table.
Cost Depreciation Accumulated Book Value
Expense Depreciation
Year 2018 10000 2000 2000 8000
31 Dec
Year 2019 10000 2000 4000 6000
31 Dec
Year 2020 10000 2000 6000 4000
31 Dec
Year 2021 10000 2000 8000 2000
31 Dec
Year 2022 10000 2000 10000 0
31 Dec
Depreciation expense should be included in income statement / statement of financial
position (underline the correct item)
Accumulated depreciation should be included in income statement / statement of
financial position (underline the correct item)
If the journal entries made on 1 January 2018:

Dr Machine 10000
Cr Cash 10000
The adjusting entries made on 31 December 2018:

Dr ______depreciation expense 2000___________


Cr ______accumulated depreciation 2000____________

The adjusting entries made on 31 December 2019:

Dr ________depreciation expense 2000________________


Cr _____ accumulated depreciation 2000_________

Example 3
If $12000 annual fee was received from client on 1 July 2019, the company provides
consultancy service to the client. If the company prepared the financial statement on
a quarterly basis, the amount of unearned revenue as at 30 September = __$9000___,
the service revenue (service income) for 1 July 2019 to 30 September 2019 = $3000_.

If the journal entries made on 1 July 2019:


Dr Cash 12000
Cr Unearned revenue 12000

The adjusting entries made on 30 September 2019:

Dr ___Unearned Revenue 3000_______


Cr ___service Revenue 3000________
Service Revenue should be included in income statement / statement of financial
position (underline the correct item)
Unearned Revenue should be included in income statement / statement of financial
position (underline the correct item)
Example 4

The payments for electricity expenses of ABC Company are shown as follows:

Cash payment time


January 2020 Paid 2,500 for electricity consumed in Dec 2019
February 2020 Paid 2,500 for electricity consumed in January 2020
March 2020 Paid 2,500 for electricity consumed in February 2020
April 2020 Paid 2,500 for electricity consumed in March 2020
May 2020 Paid 2,500 for electricity consumed in April 2020
June 2020 Paid 2,500 for electricity consumed in May 2020
July 2020 Paid 2,500 for electricity consumed in June 2020
August 2020 Paid 2,700 for electricity consumed in July 2020
September 2020 Paid 2,700 for electricity consumed in August 2020
October 2020 Paid 2,700 for electricity consumed in September 2020
November 2020 Paid 2,700 for electricity consumed in October 2020
December 2020 Paid 2,700 for electricity consumed in November 2020
January 2021 Paid 2,700 for electricity consumed in December 2020

The amount of electricity expense for the year ended 31 December 2020 = _$31200_.
Included in the statement of financial position as at 31 December 2020, the amount of
__$27000__ will be included in the current assets / current liabilities (underline the
correct item) section and named as _utilities payable_.
Example 5

The company provided repair service to a client, PPC Company, in December 2019
and billed the client for $8000. The company received cash on 7 January 2020.

The adjusting journal entries on 31 December 2019:

Dr ___Accounts receivable _$8000____


Cr ___Service Revenue $8000______

The income from this repair service will be reported in the income statement for the
year ended 31 December 2019 / 2020(underline the correct item).

Included in the statement of financial position as at 31 December 2019, the amount of


_$8000___will be included in the current assets / current liabilities (underline the
correct item) section and named as _Account receivable____.

The journal entries on 7 January 2020:

Dr __cash $8000_____
Cr __Account receivable $8000________

Examples (1 , 2 , 3 , 4, 5) are examples of Deferrals.


Examples (1 , 2 , 3 , 4, 5) are examples of Accruals.

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