Short Notes From Lectures #6

LECTURE 4 (20/04/2019)

REVISION
In the previous class, I had explained about preparing financial statements
(SOPL & SOFP) based on the unadjusted trial balance. The main purpose
of that discussion was to introduce the related format of SOPL & SOFP which
is regarded as the main preparation before discussing adjustments. Learning
how to do adjustments would be much easier and less confusing if the
students have already know how to construct the two financial statement
according to its format.

ACCOUNTING PROCESS

JOURNAL/BOOK LEDGER/T
TRANSACTIONS OF PRIME ENTRY ACCOUNT TRIAL BALANCE SOPL & SOFP

Source of documents Adjustments

ADJUSTMENT
There will be two categories of adjustment:
1. To amend/change the existing figures in the trial balance,
and/or
2. To introduce new items/ledgers.
Regardless of the effects, total of the debit and credit of trial balance
would remain equal. It is important to note that adjustments from
additional information section require two adjusting entries (See Figure
1.0 for three possible combinations of adjusting entries), except for
adjustment on bad debt & allowance for doubtful debts.
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 Short Notes From Lectures #6

#1 #2 #3
on existing on existing introduce
item item new item

on existing introduce introduce

item new item new item

Figure 1.0 Three Possible Combinations of Adjusting Entries

EXAMPLES OF ADJUSTING ENTRIES

(Based on Past Year Exam; Dec 2018, Q3)

Explanation: Both adjusting items are already

#1 available in the trial balance

Example: Additional information number 7

on existing
item “The owner had withdrawn RM800 cash for personal
use”

Effects: Decrease in Asset (Cash) and Decrease in

on existing Owner’s Equity (Drawings)
item
Journal Entries: Dr Drawing, Cr Cash

Notes: (1) Increase existing item; Drawings by RM800 and (2) reduce
another existing item; Cash by the same value.

2
 Short Notes From Lectures #6

Explanation: One adjusting items are already

available in the trial balance, but not the other one.

Example: Additional information number 2

“Depreciation for the year for Office Equipment, 10%

p.a. on a straight line method, yearly basis”

Effects: Increase in Expense (Depreciation) and

Increase in Contra Asset (Accumulated Depreciation)

Journal Entries: Dr Depreciation, Cr Acc Depreciation

Notes: (1) Increase existing item; Accumulated Depreciation of Office

Equipment by RM1,050 [10% x RM10,500] and (2) Introduce new item
(Expense); Depreciation Expense by the same value.

Explanation: Both adjusting items are not available in

the trial balance. For example, additional information
number 5.

“Loan was taken on 1 July 2018 and interest on loan

has yet to be paid”

Effects: Increase in Expense (Interest on Loan) and

Increase in Liability (Accrued Interest on Loan)

Journal Entries: Dr Interest on Loan, Cr Accrued

Interest on Loan

Notes: (1) Introduce new item (Expense); Interest on Loan by RM2,500

[10% x RM50,000 x 6/12] and (2) Introduce another new item (Liability);
Accrued Interest on Loan by the same value.