ACCTG102 · Accounting Concepts
Accrual Accounting & Adjusting Entries
Week 3 of ACCTG 102 Accounting Concepts at the University of Auckland moves the ledger onto the accrual basis: revenue when earned, expenses when incurred, regardless of cash. You learn the four adjusting-entry families (prepaid expenses including depreciation, revenue received in advance, accrued revenues, accrued expenses), then the adjusted trial balance, the financial statements it feeds, closing the books through the Profit or loss summary, and the 9-step accounting cycle. Recent test papers gave the dedicated adjusting-entries question 6–8 marks, and the same catch-up logic returns in the final's non-current-asset questions.
What this chapter covers
- 011. Accrual vs cash accounting: recognise revenue when goods/services are provided and expenses when incurred — the timing distortion the cash basis creates
- 022. Revenue recognition under NZ IFRS 15: five contract conditions and the five-step model
- 033. The four adjusting-entry families: prepaid expenses, revenue received in advance, accrued revenues, accrued expenses — each pairs one P&L account with one balance-sheet account, never Cash
- 044. Depreciation as allocation (not valuation): Dr Depreciation expense / Cr Accumulated depreciation, and carrying amount = cost − accumulated depreciation
- 055. The recurring trap: questions state the unearned amount REMAINING — the adjustment is the ledger balance minus that figure
- 066. Omission effects: which way profit, assets and liabilities are overstated or understated when an adjustment is skipped
- 077. The adjusted trial balance and preparing the statements from it (profit → retained-earnings roll-forward → statement of financial position)
- 088. Closing entries: revenues and expenses through the Profit or loss summary to Retained earnings; dividends close to Retained earnings directly
- 099. The 9-step accounting cycle, ending in the post-closing trial balance of permanent accounts only
Adjusting entries from a trial-balance extract — Ponsonby Pilates Studio Ltd
- +1Supplies: used = 2,600 on the ledger − 900 counted on hand = 1,700. Entry: Dr Supplies expense 1,700 / Cr Supplies 1,700 — debits equal credits.
- +2Prepaid insurance: monthly expiry = 3,600 ÷ 12 = 300; the policy has run three months (January–March), so 900 has expired. Entry: Dr Insurance expense 900 / Cr Prepaid insurance 900, leaving a 2,700 asset for the nine unexpired months.
- +2Class fees received in advance: the note gives the amount REMAINING, not the amount earned. Earned = 2,000 ledger balance − 800 remaining = 1,200. Entry: Dr Class fees received in advance 1,200 / Cr Class fee revenue 1,200 — the liability runs down to 800.
- +1Accrued wages: daily rate = 3,000 ÷ 5 = 600; three unpaid working days = 1,800. Entry: Dr Wages expense 1,800 / Cr Wages payable 1,800. Check the set: every entry balances, each pairs one profit-or-loss account with one balance-sheet account, and none touches Cash.
Key terms
- Accrual basis
- Recognise revenue when goods or services are provided and expenses when assets are consumed or liabilities incurred — regardless of when cash is received or paid. The required basis, because it reflects each period's real performance; the cash basis distorts profit whenever cash timing lags the work.
- Adjusting entries
- Period-end journal entries that bring the ledger onto the accrual basis. Two categories, four families: prepaid expenses and revenue received in advance (cash moved first), accrued revenues and accrued expenses (recognition first). Every adjusting entry pairs one profit-or-loss account with one balance-sheet account — Cash is never one of them.
- Revenue received in advance (unearned revenue)
- A liability recorded when a customer pays before the service is provided (Dr Cash / Cr Revenue received in advance). At period end, the portion of the obligation satisfied moves to revenue: Dr Revenue received in advance / Cr Revenue.
- Accumulated depreciation & carrying amount
- Depreciation allocates a non-current asset's cost over its useful life — an allocation process, not a valuation. The entry is Dr Depreciation expense / Cr Accumulated depreciation (a contra asset), and carrying amount = cost − accumulated depreciation.
- Adjusted trial balance
- The listing of all ledger balances after adjusting entries are posted. It proves total debits equal total credits and is the main basis for preparing the statement of profit or loss, the retained-earnings calculation and the statement of financial position.
- Closing entries & Profit or loss summary
- Entries that zero the temporary accounts at period end: revenues and expenses close to the Profit or loss summary, whose balance (the profit) transfers to Retained earnings; dividends close to Retained earnings directly, never through the summary. Permanent accounts (assets, liabilities, equity) carry forward.
- Accounting cycle
- The nine-step loop repeated each period: analyse transactions → journalise → post to the ledger → trial balance → adjusting entries → adjusted trial balance → financial statements → closing entries → post-closing trial balance.
Accrual Accounting & Adjusting Entries FAQ
How are adjusting entries examined in ACCTG 102 at the University of Auckland?
The mid-semester Inspera test (20%, 50 marks, 90 minutes, open book, Chapters 1–5, no formula sheet) has carried a dedicated adjusting-entries question worth 6–8 marks in recent papers: an unadjusted trial-balance extract plus notes on supplies, prepaid insurance, depreciation and unearned revenue. Pre-workshop Quiz 3 samples the chapter in MCQ form, and the comprehensive 2-hour final (50% per the University course catalogue) reuses the same logic as catch-up depreciation before asset disposals.
Can AI help me with accrual accounting and adjusting entries in ACCTG 102?
Yes — as a study tool. Sia explains adjusting entries step by step: it helps you classify the family (prepayment vs accrual), build the Dr/Cr skeleton, and check that debits equal credits and that Cash is untouched, so you understand the method rather than just an answer. Note that the ACCTG 102 mid-semester test explicitly prohibits AI tools during the sitting, and no tool can promise marks — use AI for practice and understanding before test day, not during assessments.
What is the difference between prepayments and accruals?
In a prepayment, cash moved first: a prepaid expense (asset) becomes an expense as it is used or expires, and revenue received in advance (liability) becomes revenue as the obligation is satisfied. In an accrual, recognition comes first and cash follows: accrued revenue is earned but not yet billed (Dr Receivable / Cr Revenue) and an accrued expense is incurred but not yet paid (Dr Expense / Cr Payable, e.g. interest = principal × rate × time).
Exam move
Memorise the four-family grid until classification is automatic — prepayment or accrual, asset or liability side — because the family fixes the Dr/Cr skeleton before any arithmetic. Then drill the three computations the notes always supply: usage from a physical count (supplies), time apportionment (premium ÷ 12 × months elapsed; principal × rate × time for interest; daily rate × unpaid days for wages), and the 'amount remaining' trap for unearned revenue (adjust by ledger balance minus remaining). Since the test is open book but has no formula sheet and runs at roughly 1.8 minutes per mark, speed comes from reflexes, not notes: check every entry balances, confirm Cash never appears in an adjusting entry, and rehearse the closing sequence (revenues and expenses through the Profit or loss summary to Retained earnings; dividends direct). Finish by working full cycles — trial balance to post-closing trial balance — because the assignment and the final both reward seeing the loop whole.
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