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5.1 BASIS OF ACCOUNTING

Cash-Basis Accounting Accrual-Basis Accounting

Revenues recognized when cash is Revenues are recognised when services are
received. performed or goods are delivered (rather
than when they receive cash).

Expenses recognized when cash is paid. Expenses are recognized when incurred
(rather than when cash is paid).

Profit = Cash Revenue - Cash Expenses Profit = Recognized Revenue –Incurred

Expenditure

Cash-basis accounting is not in accordance In accordance with Generally Accepted

with Generally Accepted Accounting Accounting Principles (GAAP).
Principles (GAAP).

5.2 DEFINITION OF REVENUES AND EXPENSES

Particular Revenues Expenses

Definition Acquisition of business Cost incurred from sales of
Revenues through sale of goods/services to generate
goods and services revenues
Concept Revenue Recognition concept Expense Recognition concept
Effects on owner’s Increase owner’s equity Reduce owner’s equity
equity

5.3 REVENUES AND EXPENSES

Revenues Expenses
Revenue from operation: Operating expenses:
Revenue obtained from core Expenses engaged in running the
business activity business operation.
e.g.: Sales revenue and service e.g.: Transportation cost, wages and
revenue salaries, rent
Other revenues: Non-operating expenses:
Obtained not from core activity Expenses not directly engaged in
e.g.: interest revenue from savings, business main operation.
dividend received Interest paid on loan, Loss on
disposal of assets.

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5.4 REVENUE EXPENDITURES AND CAPITAL EXPENDITURES

Revenue Expenditures vs. Capital Expenditures

Any expenditure incurred to maintain the Any expenditure incurred to obtain an asset
assets in working condition and for the or bring it into working condition.
business operation.
Decrease business profit. Improve the efficiency or working life of an
asset.
The benefit is received in the current The benefit is received over a period of more
period and sometimes recurring. than one year.
Report in the Statement of Profit and Loss Report in the Statement of Financial Position.
e.g.: repair of furniture, cleaning of e.g.: purchase of machinery, installation cost
machinery, repainting of building. of machinery, custom duty on purchase of
machinery.

Guidelines in determining the Revenue Expenditure or Capital Expenditure

Materiality- determine the amount involved is small or large. The large amount and
can impact items in financial statement is considered material. Large amount
normally referred to Capital Expenditure.
Frequency- high frequency or regular expenses do not involve large amount. This
normally referred to Revenue Expenditure.
Extend the asset efficiency or its useful life- normally involves large amount and
referred to Capital Expenditure.

5.5 RENENUES AND EXPENSES REPORTING

Revenue Revenue > Expense= Profit

Statement
Profit or Loss
Revenue < Expense= Loss
Expense

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Income measurement for a trading concern

SALES

COST OF GOODS SOLD

GROSS PROFIT

OPERATING EXPENSES

NET PROFIT

Perniagaan Bersama
Statement of Profit or Loss
For The Year Ended 31 December 2019
RM RM
Sales 20,000
(-) Cost of Goods Sold (8,000)
Gross Profit 12,000
(-) Operating expenses
Advertising expense 3,100
Rent expense 4,900
Depreciation expense 500
Total Expenses (8,500)
Net Profit 3,500

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Perniagaan Seia Sekata

Statement of Profit or Loss
For The Year Ended 31 December 2019
RM RM
Revenues: Service Revenues 2,700
(-) Operating expenses
Advertising expense 500
Rent expense 400
Depreciation expense 800
Total Expenses (,700)
Net Profit 1,000

5.6 PURPOSE OF ADJUSTMENT- Why do we need adjusting entries.

To ensure Revenue Recognition and Expense Recognition are followed.

 Revenue recognition- recognize revenue in the current accounting
period.
 Expense recognition- match expenses with revenues in the same
accounting period.
It is in accordance with GAAP (Generally Accepted Accounting Principles)
before preparing financial statements.
To ensure trial balance contains up-to-date and complete data.

5.7 TYPES OF ADJUSTMENTS

Unearned Revenue
Accrued Revenue
Prepaid Expenses
Accrued Expenses/ Expenses Payable
Depreciation Expenses
Bad Debt Expenses

5.7.1 Unearned Revenues.

Receive cash and record as a liability since goods/services not yet delivered.
Unearned revenues often occur in regard to:
i. Rent
ii. Airline ticket
iii. Online purchase
iv. Customer deposit/booking
Adjusting entry is made to recognise and record the revenue for services
performed during the period and to show the liability that remains at the end
of the period.

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Dt. Unearned Service revenue XXX

Ct. Service Revenue XXX

OR

Dt. Service revenue XXX

Ct. Unearned Service revenue XXX

Example 1:

Pioneer Advertising received RM 1,200 on 2 nd October 2019 from Salman for

advertising services expected to be completed by 31 st January 2020. Unearned
Service revenue shows a balance of RM 1,200 in the Trial Balance as at 31 st
December 2019. Analysis reveals that the company performed RM 800 of
advertisement in 2019.

Pioneer Advertising
Trial Balance as at 31st December 2019
Item Dt.(RM) Ct.(RM)
Unearned Service revenue 1,200

Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

Example 2:

Pioneer Advertising received RM 1,200 on 2 nd October 2019 from Salmah for

advertising services expected to be completed by 31 st January 2020. Service revenue
shows a balance of RM 1,200 in the Trial Balance as at 31 st December 2019. Analysis
reveals that the company performed RM 700 of advertisement in 2019.

Pioneer Advertising
Trial Balance as at 31st December 2019
Item Dt.(RM) Ct.(RM)
Service revenue 1,200

Adjusting entries:

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Item Dt.(RM) Ct.(RM)

Dt.
Ct.

5.7.2 Accrued Revenues.

Revenue for services performed but not yet received in cash or not yet
recorded. It is considered as an asset.

Revenue recorded Before Cash Receipt

Accrued revenue often occurs in regard to:

1. Rent
2. Interest
3. Services
Adjusting entry shows the receivable that exists and records the revenues for
services performed.
Adjusting entry:
Increases (Dt) an asset account and increases (Ct) a revenue account.

Item Dt.(RM) Ct.(RM)

Dt. Accrued Revenue XXX
Ct. Revenue XXX

Example 3:

As of 31st December 2019, there was RM500 rental revenue has not been recorded
by Pioneer Advertising

Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

Example 4:

In December, Pioneer Advertising performed services worth RM2,000 that were not
billed to clients on or before 31 December 2019.

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Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

5.7.3 Prepaid Expenses

Payment of cash, that is recorded as an asset to show the service or benefit

the company will receive in the future.

Revenue recorded Before Cash Receipt

Prepaid Expenses often occur in regard to:

1. Insurance
2. Supplies
3. Advertising
4. Rent
5. Equipment
6. Buildings
Expire either with the passage of time or through use.
Adjusting entry:
Increases (Dt) to an expense account and Decreases (Ct) to an asset account.

Item Dt.(RM) Ct.(RM)

Dt. Insurance Expense XXX
Ct. Prepaid Insurance(asset) XXX
Or

Item Dt.(RM) Ct.(RM)

Dt. Prepaid Insurance(asset) XXX
Ct. Insurance Expense XXX

Item Dt.(RM) Ct.(RM)

Dt. Supplies expense XXX
Ct. Supplies(asset) XXX
Or

Item Dt.(RM) Ct.(RM)

Dt. Supplies(asset) XXX
Ct. Supplies expense XXX

Supplies (expire through use)

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Example 5:

Pioneer Advertising purchased supplies costing RM2,500 on 5 th October 2019.

Pioneer recorded the payment by increasing (Dt.) the asset supplies. This account
shows a balnce of RM2,500 in the Trial Balance as at 31 December 2019. An
inventory count at the end of 31st December revealed that RM1,000 of supplies were
still in hand.

Pioneer Advertising
Trial Balance as at 31st December 2019
Item Dt.(RM) Ct.(RM)
Supplies 2,500

Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

Supplies (expire through use)

Example 6:

Pioneer Company purchased supplies costing RM2,500 on October 5. Pioneer

recorded the payment by increasing (Dt.) the supplies Expenses. This account shows
a balance of RM2,500 in the Trial Balance as at 31 st December 2019. An inventory
count at the end of 31st December revealed that RM1,500 of supplies had been used.

Pioneer Advertising
Trial Balance as at 31st December 2019
Item Dt.(RM) Ct.(RM)
Supplies expense 2,500

Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

Insurance (expires with the passage of time)

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Example 7:

On October 4, Pioneer paid RM600 for a one-year fire insurance policy. Coverage
began on October 1. Pioneer recorded the payment by increasing (Dt.) Prepaid
Insurance. This account shows a balance of RM600 in the Trial Balance as at 31 st
December 2019.

Pioneer Advertising
Trial Balance as at 31st December 2019
Item Dt.(RM) Ct.(RM)
Prepaid Insurance 600

Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

Insurance (expires with the passage of time)

Example 8:

On October 4, Pioneer paid RM600 for a one-year fire insurance policy. Coverage
began on October 1. Pioneer recorded the payment by increasing (Dt.) Insurance
Expense. This account shows a balance of RM600 in the Trial Balance as at 31 st
December 2019.

Pioneer Advertising
Trial Balance as at 31st December 2019
Item Dt.(RM) Ct.(RM)
Insurance expense 600

Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

5.7.4 Accrued Expenses / Expenses Payable

Expenses Recorded Before Cash Payment

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Accrued revenues often occur in regard to:

1. Rent
2. Interest
3. Taxes
4. Salaries
Adjusting entry records the obligation and recognizes the expense.
Adjusting entry:
Increases (Dt.) an expense account and increases (Ct.) a liability account.

Item Dt.(RM) Ct.(RM)

Dt. Expense XXX
Ct. Accrued expense XXX

Accrued Salaries and Wages

Example 9:

Pioneer Advertising paid salaries and wages on day first every month. Worker’s
salaries in December amounted to RM2,000 will be paid on 1 st January.

Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

5.7.5 Depreciation Expenses

Buildings, equipment and motor vehicles (assets that provide service for
many years) are recorded as assets rather than as expenses, on the date
acquired.
Depreciation is the process of allocating the cost of an asset to expense over
its useful life.
Accumulated depreciation is called a contra asset account.
Adjusting entry:

Item Dt.(RM) Ct.(RM)

Dt. Depreciation Expense XXX
Ct. Accumulated Depreciation XXX

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Example 10:

For Pioneer Advertising, assuming that the depreciation on the equipment is RM500
a year.

Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

Statement Presentation

Accumulated depreciation is a contra asset account (credit).

An offset to asset account in the balance sheet (financial position statement).
Book value is the difference between the cost of any depreciated asset and
its accumulated depreciation.

Example: RM
Equipment 5,000
Less: Accumulated Depreciation- Equipment (500)
4,500

5.7.6 Bad Debt Expenses

Definition: bad debt is a debt by a customer(an asset to the business) that is

almost certain cannot be collected. Whenever a bad debt occurs, the debtor
account should be closed.
There are many reasons why a bad debt occurs. Among them are:
1. The debtor may have passed away.
2. The debtor may have become bankrupt.
3. The debtor may have disappeared.
Adjusting entry:

Item Dt.(RM) Ct.(RM)

Dt. Bad Debt Expense XXX
Ct. Account Receivable XXX

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Example 11:

On December 31st, the company has been successfully identified that a debtor
named Sadat has gone bankrupt and unable to pay its debt of RM 1,000.

Adjusting entries:

Item Dt.(RM) Ct.(RM)

Dt.
Ct.

5.8 Correcting Entries

Errors affecting Trial Balance Errors NOT affecting Trial Balance

1. An error in the journal (the entry 1. Missed the transaction
has not yet been posted). 2. Mistake misstated
2. Journal entry is correct, however 3. Mistakes reciprocity
mistake while posting to ledger. 4. Error principle.
3. Error in a journal entry that has
already been posted (both journal
and ledger are incorrect).

Examples:

1. Buying furniture RM10,000 in cash was recorded with the value of RM1,000.
2. Commissions received RM1,500 in cash was recorded as follows:
Dt. Commissions received RM 1,500
Ct. Cash RM 1,500
3. Pay RM2,000 in cash for repairs of damaged vehicle were recorded as
follows:
Dt. Vehicle RM 2,000
Ct. Cash RM 2,000

Prepare journal entries to record error correction.

RM RM

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5.9 Preparation adjusted Trial Balance

It is prepared after all adjusting entries are journalized and posted.

The purpose is to prove the EQUALITY of debit balances and credit balances
in the ledger.
It is the primary basis for the preparation of financial statement.
Financial statements are prepared using adjusted trial balance information.

EXERCISES
Question 1

a) Define revenue and expenditure.

b) What is the difference between revenue expenditure and capital expenditure?

Question 2

Classify the items below to revenue expenditure and capital expenditure.

a. Buy a used truck for your business.

b. The annual cost of insurance and lorry road tax.
c. The cost of modifying the truck engine.
d. The cost of truck maintenance every month.
e. Buy new machines worth RM100,000.
f. The transportation cost to bring a new purchased engine for the factory.
g. Cost of installation new machines RM10,000.
h. Cost of repairing a damaged machine.
i. Spend a total of RM5,500 to the machine in which RM5,000 is adding the engine
machine capacity and RM500 for the cost of repairing the machine.
j. Cost of painting the walls of new buildings.
k. After three-year, RM2,000 is used to paint a small part of the building in (j).

Question 3:

Perniagaan Sehati Sejiwa (PSS) is involved in selling souveniers business. Here is the Trial
Balance before adjustment on July 31st 2018:

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Perniagaan Sehati Sejiwa

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Trial Balance as at 31st July 2019

  RM RM
Cash 14,200  
Accounts Receivable 9,500  
Office Supplies 1,700  
Inventory on 1/6/2018 5,000  
Vehicles 100,000  
Accumulated depreciation – vehicle   30,000
Accounts Payable   18,000
Capital   56,060
Drawings 5,000  
Sales   70,000
Purchases 35,000  
Sales return and allowance 1,700  
Purchases return and allowance   2,200
Sales discount 500  
Purchases discount   1,200
Carriage inwards 800  
Carriage outwards 1,600  
Prepaid Insurance 1,200  
Interest income   1,100
Salaries expenses 3,560  
Unearned rental income 1,200
  179,760 179,760

Additional information:
1. Inventory on July 31st, 2019 is RM6,300.
2. Balance of office supplies on 31st July 2019 is RM200.
3. Salary expenses for the month of July 2019 amounted to RM500 remains unpaid.
4. Interest income worth RM200 has not been received.
5. Insurance purchased on May 1st, 2019 is for a period of one year.
6. Rental unearned income of RM1,000 services had been completed.
7. Depreciation of vehicles is 15% above cost.

REQUIRED:

a) Prepare the journal entries adjustment on July 31st, 2019.

b) Prepare Profit or Loss Statement for the year ended July 31st, 2019.

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c) Prepare the Statement of Financial Position as at 31st July 2019.

Question 4

Perniagaan Seiring Sejalan (PSS) is operating a business of selling clothes. Below is the
Trial Balance before adjustment on June 30th, 2018:

Perniagaan Seiring Sejalan

Trial Balance as at 30th June 2018
  RM RM
Cash 15,200  
Accounts Receivable 8,500  
Inventory as at 1/7/2017 5,000  
Vehicles 80,000  
Vehicles Accumulated Depreciation   16,000
Accounts Payable   18,000
Capital   51,800
Drawings 5,000  
Sales   70,000
Purchases 35,000  
Sales return and allowance 2,700  
Purchases return and allowance   2,000
Sales Discount 500  
Purchases Discount   1,400
Carriage inward 800  
Carriage outward 1,600  
Wages on purchases 500
Insurance expenses 1,200  
Interest income   1,100
Salary expenses 5,500  
Rental income 1,200
  161,500 161,500

Additional Information:

1. Inventory as at 30th June 2018 is RM6,300.

2. Insurance in advance is RM600.

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3. Salary expenses of RM500 is still outstanding.

4. Rental income services of RM400 has not been completed.
5. Interest income amounting RM200 has not been received.
6. A debtor has been declared bankrupt and his debts of RM400 become bad debts.
7. Depreciation expenses of vehicles is RM16,000.

REQUIRED:

a) Prepare the adjusting entries on June 30th, 2018.

b) Prepare a Statement of Profit or Loss for the year ended June 30th, 2018.
c) Prepare the Statement of Financial Position as at June 30th, 2018.

Question 5

The following lists are the trial balance of Perniagaan Comel before adjustment.

Perniagaan Comel
Trial Balance before adjustment
As at 30th June 2019
Items Debit (RM) Credit (RM)

Capital 40,200

Cash 9,500

Sales 78,200

Purchases 56,100

Accounts Receivable 5,400

Accounts Payable 7,800

Vehicles 60,000

Accumulated Depreciation - Vehicle 12,000

Prepaid insurance 1,800

Salaries 4,400

Inventory 1,000

Total 138,200 138,200

Additional information:

1. Closing Inventory as at 30th June 2019 is RM800.

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2. Prepaid insurance is for a period of one year beginning 1st January 2019.

3. Accrued Salaries amounting RM400 for the month of June 2019.

4. Depreciation of vehicles made at the rate of 10% using straight-line method.

5. Up to June 30th 2019, RM3,000 credit sales have not been recorded.

YOU ARE REQUIRED TO:

i. Prepare adjustment journal entries for the above transactions (description

omitted).

ii. Prepare a Statement of Comprehensive Income for the year ended June 30th,
2019.

iii. Prepare the Financial Position Statement as at June 30th, 2019.

Question 6

The lists below are the trial balance of Perniagaan Nautica before adjustment.

Perniagaan Nautica
Trial Balance
as at 31st December 2018(Before Adjustment)
Accounts Debit (RM) Credit (RM)

Cash 20,625

Accounts Receivable 14,125

Inventory, 1st January 2018 10,000

Prepaid Insurance 1,150

Equipment 30,000

Accumulated Depreciation - Equipment 11,500

Accounts Payable 6,000

Capital 41,500

Drawings 2,500

Sales 150,000

Sales returns 7,500

Purchases 106,850

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Purchase returns 3,750

Salaries 12,750

Rental expenses 7,250

Total 212,750 212,750

Additional information:

1. Inventory as at 31st December 2018 worth RM17,750.

2. Depreciation expenses for equipment amounting RM5,750 per annum.

3. Accrued salaries amounting RM315 as at 31st December 2018.

4. Insurance expenses is RM325 for the year ended 2018.

5. Cash withdrawal of RM275 yet to be recorded.

YOU ARE REQUIRED TO:

i. Prepare adjustment journal entries for the above transactions (description

omitted).

ii. Prepare a Statement of Comprehensive Income for the year ended December
31st, 2018.

iii. Prepare the Financial Position Statement as at 31st December 2018.

Question 7

Abdullah Sdn. Bhd. (ASB) is a business offers a laundry service. ASB financial year ended
on June 30th of each year. The trial balance before adjustment as at 30 th June, 2019 is as
follows:

Abdullah Sdn. Bhd.

Trial Balance Before Adjustment

As at 30th June 2019

Accounts Debit (RM) Credit (RM)

Cash 20,700

Accounts Receivable 10,000

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Equipment 185,000

Accumulated depreciation - Equipment 60,000

Kenderaan / Vehicles 28,500

Accumulated depreciation - Vehicles 13,100

Capital 97,000

Drawings 5,000

Service Revenue 114,900

Advertisement expenses 14,300

Salaries expenses 15,600

Utility expenses 2,500

Insurance expenses 2,400

Miscellaneous expenses 1,000

285,000 285,000

Additional information:

1. Prepaid insurance amounting RM1,650.

2. Sending washed laundry to Desa Aman Children's Welfare Home amounting

RM3,500 on 30th June 2019. The bill has yet to be submitted to the
management of the home.

3. Unearned revenue worth RM25,600.

4. Accrued Salaries amounting RM1,570.

5. ASB estimates the allowance for doubtful debts 5% from the balance of
account receivables.

6. Depreciation is calculated using straight-line method at the following rates:

 Equipment - 15%
 Vehicles - 20%

YOU ARE REQUIRED TO:

i. Prepare journal entries to record the adjustments for the above additional
information (description omitted).

ii. Prepare a Statement of Comprehensive Income for the year ended June 30 th,
2019.

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iii. Prepare the Financial Position Statement as at June 30th, 2019.

Question 8

The financial year of Sanguine Enterprise (SE) ended on June 30th every year. Here is the
lists of account balances as at June 30th, 2019.

Debit (RM) Credit (RM)

Cash 13,550

Accounts receivable 37,500

Prepaid insurance 1,800

Long-term investments 20,000

Land 50,000

Buildings 137,500

Accumulated depreciation - Buildings 51,000

Office equipment 90,100

Accumulated Depreciation - Office equipment 35,300

Accounts payable 33,500

Long-term loans (6% per annum) 25,000

Prepaid rental revenue (Advanced rent revenue) 3,000

Capital 222,500

Drawings 10,000

Sales 288,400

Purchases 90,000

Return on sales 8,000

Purchases return 5,500

Sales discounts (discounts allowed) 3,050

Purchase discounts (discounts received) 2,250

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Inventories, July 1st, 2018 15,000

Salaries and wages expenses 101,200

Advertisement expenses 58,200

Utility expenses 19,000

Repair expenses 11,550

666,450 666,450

Additional information:

1. Inventories as at June 30th, 2019 worth RM23,550.

2. Insurance used during the year amounted to RM800.

3. Interest on long-term loan to be paid 2 times a year, on June 30th and

December 31st.

4. Depreciation of buildings and office equipment for the current year amounted to
RM1,620 and RM3,500 respectively.

5. Accrued salaries and wages amounting RM1,050.

6. Prepaid rent revenue of RM1,000.

7. On 30th June 2019, the debtor, En. Ramli was declared bankrupt. His account
outstanding balance is RM10,000. SE has decided to write off the account of
En. Ramli and make a provision for doubtful debts 1% of the accounts
receivable balance as at June 30th, 2019.

YOU ARE REQUIRED TO:

i. Prepare journal entries for adjustments for the related transactions.

ii. Prepare a Statement of Comprehensive Income for the year ended June 30th,
2019.

iii. Prepare the SE Financial Position Statement as at June 30th, 2019.

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Question 9

The following information obtained from Dynasty Enterprise account balances for the year
ended December 31st, 2018.

Accounts RM

Capital (1st January 2018) 60,000

Van 10,000

Accumulated Depreciation - Van 2,000

Office equipment 15,000

Accumulated Depreciation - Office Equipment 3,000

Inventory (1st January 2018) 37,000

Cash 8,900

Purchases 180,000

Sales 250,000

Bad Debts expenses 300

Accounts Receivable 50,000

Accounts Payable 16,450

Insurance expenses 500

Purchases Discount 750

Salaries expenses 23,500

Sales returns 2,500

Miscellaneous expense 2,500

Purchase return 500

Drawings 2,500

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Additional information:

1. Inventories as at December 31st, 2018 is RM25,000.

2. Insurance prepaid amounting RM200.

3. Bad debts written off is RM650.

4. Miscellaneous expenses of RM250 is still outstanding.

5. Van depreciated at 20% per annum using reducing balance method.

6. Office equipment is depreciated at 10% per annum on a straight line method.

YOU ARE REQUIRED TO:

i. Prepare journal entries adjustment (ignore the description).

ii. Prepare a Statement of Comprehensive Income for the year ended December
31st, 2018.

iii. Prepare the Financial Position Statement as at December 31st, 2018.

“Don’t stop when you’re tired. Stop when you’re done”

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