Profit Determination
Profit Determination
Prepared by John Hoggett and Clare Innes
Measurement of Profit
• Cash basis
• Cash income received - Cash expenses paid
– Revenues recorded when received – Expenses recorded when paid
• Accrual basis
• Profit = Income (incl. Revenues) - Expenses
– Revenue is recognised when the anticipated inflow of economic benefit can be reliably measured – Expenses when the consumption of benefits can be reliably measured
2
Adjusting Entries
• The need for adjusting entries- needed because the cash receipt or payment does not coincide with the recognition criteria for income and expenses. • Classification
– Deferrals
• prepaid expenses • pre-collected or unearned revenue
– Accruals
• accrued expenses • accrued revenue
3
1
The Accounting Cycle – The place for adjusting entries
1. Recognise & record transactions Source documents
2. Journalise transactions
General journal
3. Post to ledger accounts
General ledger
4. Prepare unadjusted trial balance of GL
Trial balance (unadjusted)
4
Continued next slide
The Accounting Cycle (cont’d)
5. Determine adjusting entries and/or journalise General journal
6. Post adjusting entries to general ledger
General ledger (accounts adjusted)
7. Prepare adjusted trial balance of GL (adjusted)
Trial balance (adjusted)
8. Prepare financial statements
work sheet
Financial statements
5
Prepaid Expenses
• Amounts paid before the benefit is consumed
ASSET ACCOUNT Prepaid Expenses Initial cost Debit Adjusting entry Credit
EXPENSE ACCOUNT Adjusting entry Debit
cost used up, incurred or expired
6
2
Example: Prepaid Insurance
• On 3 June a 24 month insurance policy purchased for $960. (Ignore GST). Initially recorded as: June 3 Prepaid Insurance 960 Cash at Bank 960 to record purchase of 24 month policy
• Initially recorded as an asset • Will need to be converted to an expense as consumed
7
By 30 June, the period end, we need to
Prepared by John Hoggett and Clare Innes
Measurement of Profit
• Cash basis
• Cash income received - Cash expenses paid
– Revenues recorded when received – Expenses recorded when paid
• Accrual basis
• Profit = Income (incl. Revenues) - Expenses
– Revenue is recognised when the anticipated inflow of economic benefit can be reliably measured – Expenses when the consumption of benefits can be reliably measured
2
Adjusting Entries
• The need for adjusting entries- needed because the cash receipt or payment does not coincide with the recognition criteria for income and expenses. • Classification
– Deferrals
• prepaid expenses • pre-collected or unearned revenue
– Accruals
• accrued expenses • accrued revenue
3
1
The Accounting Cycle – The place for adjusting entries
1. Recognise & record transactions Source documents
2. Journalise transactions
General journal
3. Post to ledger accounts
General ledger
4. Prepare unadjusted trial balance of GL
Trial balance (unadjusted)
4
Continued next slide
The Accounting Cycle (cont’d)
5. Determine adjusting entries and/or journalise General journal
6. Post adjusting entries to general ledger
General ledger (accounts adjusted)
7. Prepare adjusted trial balance of GL (adjusted)
Trial balance (adjusted)
8. Prepare financial statements
work sheet
Financial statements
5
Prepaid Expenses
• Amounts paid before the benefit is consumed
ASSET ACCOUNT Prepaid Expenses Initial cost Debit Adjusting entry Credit
EXPENSE ACCOUNT Adjusting entry Debit
cost used up, incurred or expired
6
2
Example: Prepaid Insurance
• On 3 June a 24 month insurance policy purchased for $960. (Ignore GST). Initially recorded as: June 3 Prepaid Insurance 960 Cash at Bank 960 to record purchase of 24 month policy
• Initially recorded as an asset • Will need to be converted to an expense as consumed
7
By 30 June, the period end, we need to