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Module 1: Balance day adjustments

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XSIQ
*

Accounting - The accounting period

The accounting period

When balance day adjustments are made using the 'expense approach' the
payment or receipt is initially treated as an expense or revenue. That
portion of the payment, or revenue not used or received, at the end of the
accounting period, is then treated as an asset or a liability.

The following strategy is proposed to deal with adjusting, closing and
reversing entries for prepaid and accrued expenses and revenue.

This strategy is based on the idea of thinking in opposites.

begin
_prepaid expenses_
begin
_accrued expenses_

end
BANK
end
PROFIT AND LOSS A/C

end
_accrued expenses_
end
PREPAID EXPENSES

begin
accrued
revenue begin
prepaid
revenue

end
PROFIT AND LOSS A/C
end
BANK

end
prepaid
revenue end
ACCRUED REVENUE

The ledger accounts above are designed to act as a template for students
responding to a need to reconstruct accounts involving balance day
adjustments. The words in capitals state what you should know. For
instance, you should have little difficulty recording the amount paid, that
is, Bank, for an expense on the debit side of the actual expense account.
The amount expenses, as shown by Profit and Loss a/c is shown on the credit
side of that account. These two entries will appear on opposite sides in
the revenue accounts.

If you are confident that prepaid expenses appear on the credit side of
the expense account then the opposite entry must apply for accrued expenses
at the end, appearing on the debit side for that expense. By working in
'opposites' all the remaining entries may be filled in for the reversing
entries to the expense account and the other entries in the revenue
account.

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