馃攳
Prepayments and Accruals | Adjusting Entries - YouTube
Channel: Accounting Stuff
[0]
in this video I'm going to give you an
[2]
introduction to adjusting entries in
[4]
accounting specifically prepayments and
[7]
accruals I'm going to explain what they
[9]
are and why we need them hey there
[15]
welcome back to the channel I'm James
[18]
this is accounting stuff and in today's
[20]
video we're going to walk through
[21]
adjusting entries in accounting I've had
[24]
a bunch of requests from you guys in the
[25]
comments to cover this topic so thanks
[28]
for all of these it's great to know what
[29]
content you're after if you haven't
[31]
heard of adjusting entries before it's
[33]
the name that we give to the journal
[35]
entries that we post at the end of each
[37]
accounting period in order to bring our
[39]
books into alignment with the accrual
[41]
basis of accounting sound complicated
[43]
well it is kind of so I've decided to
[46]
create a mini series devoted to
[48]
unraveling the mystery of adjusting
[50]
journal entries and this is video number
[52]
1 we'll start off by taking a look at
[55]
the big picture of accounting and then
[57]
we'll drill in to uncover the problems
[59]
posed by the accrual basis and how
[61]
adjusting journal entries can help us
[63]
work around them all explain what the
[65]
four types of adjusting entry are and
[67]
how to identify them prepaid expenses
[70]
deferred revenue accrued expenses and
[72]
accrued revenue my plan is to follow
[74]
this video up with full more will
[76]
discuss how to record adjusting entries
[79]
and go through worked examples for each
[81]
type so subscribe and hit the bell to be
[83]
notified when those come out I'll take
[86]
all of these videos and put them into
[87]
one playlist that you can find up here
[90]
once it's done got it good let me know
[93]
in the comments which kind of adjusting
[94]
entry you're having the most problems
[96]
with and don't forget to watch this one
[98]
through to the end find out how all of
[100]
this works let's get cracking I said
[104]
that the justing entries of the journal
[106]
entries that we post at the end of each
[108]
accounting period to bring our books
[110]
into alignment with your cool basis of
[112]
accounting but what does that mean why
[115]
would we do that I think we need to take
[117]
a step back and look at the big picture
[118]
of financial accounting financial
[122]
accounting is the process of recording
[124]
summarizing and analyzing and entity's
[127]
financial transactions and reporting
[130]
them in financial statements to it
[132]
listing and potential investors lenders
[135]
and creditors so ultimately as financial
[138]
accountants our job is to produce
[140]
financial statements to assist our key
[143]
stakeholders with their decision-making
[145]
but what are financial statements you
[147]
can think of them as formal reports this
[150]
summarize a business's financial
[151]
performance position and cash flow
[154]
collectively they give all of the
[156]
interested parties an idea of the
[158]
business's financial health
[160]
when preparing financial statements
[161]
there are some rules that we need to
[163]
follow the specifics differs slightly
[165]
from country to country but broadly
[167]
speaking we follow the generally
[168]
accepted accounting principles GAAP
[170]
assured or the international financial
[173]
reporting standards IFRS now both GAAP
[177]
and IFRS have something in common they
[179]
both require us to produce our financial
[182]
statements in accordance with the
[183]
accrual basis of accounting now the
[185]
accrual basis of accounting is key to
[188]
understanding adjusting entries so what
[191]
is it
[191]
in a call accounting revenue is
[194]
recognized as it's earned and expenses
[196]
are recorded as they are incurred
[198]
regardless of when cash or an invoice
[202]
changes hands I made a whole video
[204]
explaining what this means and its pros
[206]
and cons versus the easier cash method
[208]
of accounting that you can find linked
[210]
up here and down below in the comments
[213]
but the key takeaway here is that
[214]
payments and invoices shouldn't dictate
[216]
when we recognize our revenues or
[218]
expenses instead we need to think about
[221]
the substance behind each transaction
[223]
that's the real trigger but the problem
[226]
is that this doesn't just happen
[227]
naturally and that's when adjusting
[229]
entries come in let me explain a normal
[232]
business transaction involves two
[234]
parties a buyer and a seller the seller
[237]
provides goods or services to the buyer
[240]
and sends them an invoice and in return
[242]
the buyer with hays them in cash so
[245]
there are three parts to this
[247]
transaction we have the transfer of
[248]
goods or services the invoice and the
[251]
payment keep that in mind for a moment
[253]
alongside all of this the financial
[256]
statements we produce are designed to
[257]
cover a range of time which we call an
[260]
accounting period depending on the
[262]
business's reporting requirements this
[263]
could be anything from a ma
[265]
to a quarter or even a full year if all
[268]
three parts of this transaction happen
[271]
in one accounting period then were all
[273]
good no adjusting entries are necessary
[275]
but when they fall into different
[277]
counting periods then we've got a
[279]
problem this is where adjusting entries
[282]
come in there are two main types
[284]
prepayments and accruals prepayments
[287]
occur when goods or services have been
[289]
paid for in advance
[291]
whereas accruals happen when goods or
[293]
services are to be invoiced in the
[295]
future in a prepayment goods or services
[298]
have been paid for in advance I'll show
[301]
you how this works I think it's best if
[303]
we think of this in terms of two
[305]
accounting periods the past and the
[307]
future with us being bang in the middle
[310]
balancing on a tie rope in the present
[312]
in a prepayment goods or services have
[315]
been paid for in advance so that means
[318]
that the payment happened back in the
[320]
past the goods or services they're going
[322]
to be delivered or consumed in the
[324]
future the problem here is that normally
[327]
the invoice and payment part of the
[329]
transaction naturally triggers an
[331]
accounting entry that recognizes the
[333]
whole transaction in the past so if we
[336]
were the buyer then we would have
[337]
recognized an expense in the past and if
[339]
we were the seller and we would have
[341]
recognized the revenue in the past but
[343]
we are accrual accounting so revenue
[346]
should be recorded as it's earned and
[348]
expenses should be recorded as they are
[350]
incurred the goods or services are going
[353]
to be provided in the future so the
[356]
revenues or expenses should also be
[358]
recognized in the future not the past
[361]
so right now before the period closes
[363]
we've still got a bit more time to make
[365]
changes in the past we need to post an
[368]
adjusting entry to reverse out those
[370]
revenues or expenses from the income
[372]
statement and hold them in the balance
[374]
sheet where they don't impact our past
[376]
financial performance then in the future
[378]
accounting period we'll post another
[380]
adjusting entry to release these from
[383]
the balance sheet to the income
[384]
statement
[385]
so we've correctly recorded our revenue
[388]
as it was earned or our expenses as they
[391]
were incurred that's how pre payments
[393]
work in general but really there are two
[395]
types depending on where we fit in
[397]
to the transaction we have prepaid
[399]
expenses and prepaid revenue which is
[403]
more commonly known as unearned or
[404]
deferred revenue if we're the buyer in
[407]
the transaction then we're dealing with
[408]
prepaid expenses because we're the ones
[411]
receiving or consuming the goods or
[413]
services however if we're the seller
[416]
then we're on the other side of the
[417]
transaction and we're dealing with
[419]
prepaid revenue because we're the ones
[421]
providing the goods or services accruals
[424]
occur when goods or services are to be
[426]
invoiced in the future these are almost
[428]
the opposite prepayments goods or
[431]
services are delivered in a past
[433]
accounting period whereas the invoice
[436]
and eventual payment come later in the
[438]
future again we have a problem the
[441]
accrual basis of accounting is telling
[443]
us that revenues or expenses should be
[445]
recognized when they're earned or
[446]
incurred in this case the substance of
[449]
the transaction happened in the past
[451]
because that's when the goods or
[453]
services were delivered or consumed
[455]
however the natural accounting trigger
[457]
in this situation happens in the future
[460]
when the invoice is raised by the seller
[462]
and received by the buyer so as things
[464]
currently stand the transaction is going
[467]
to be recognized in the future income
[469]
statement to correct this we need to
[471]
post an adjusting entry into the past
[473]
accounting period to accrue the revenues
[476]
or expenses into the income statement
[478]
and the other side of that journal will
[480]
be to temporarily hold the core as an
[483]
asset or liability in the balance sheet
[485]
in the future once the invoice has been
[487]
raised by the seller and given to the
[489]
buyer we'll need to reverse this across
[491]
so that we aren't recognizing this
[493]
transaction twice that will release the
[495]
original adjusting entry from both the
[497]
income statement and the balance sheet
[499]
again there are two categories of
[502]
accrual accrued expenses and accrued
[504]
revenue if we're the buyer in the
[506]
transaction then we're dealing with
[508]
accrued expenses because we're the ones
[510]
receiving or consuming the goods or
[512]
services however if we're the seller
[514]
then we're on the other side and we're
[516]
dealing with a crude revenue instead
[518]
because we're the ones making the money
[520]
by providing those goods or services so
[523]
adjusting entries are required to bring
[525]
our books in line with the accrual basis
[527]
of accounting which is required under
[530]
BOE
[530]
GAAP and IFRS when producing financial
[533]
statements adjusting entries are divided
[535]
into two categories pre payments occur
[538]
when goods or services have been paid
[540]
for in advance
[541]
whereas accruals occur when goods or
[544]
services are to be invoiced in the
[546]
future if you're on the buying side of
[548]
the transaction then you prepay or
[550]
accrue expenses depending on the timing
[552]
of the payment or invoice however if
[555]
you're on the selling side then you
[556]
defer revenue when you've been paid in
[558]
advance and accrue revenue when you've
[561]
already provided goods or services and
[563]
plan to invoice the customer in the
[565]
future any questions let me know down
[568]
below in the comments or message me
[569]
directly on instagram at accounting
[571]
stuff if you're still confused by
[573]
adjusting entries I totally get it and
[576]
that's why I'm going to release for new
[577]
videos covering examples of each type in
[580]
detail hit this circle to subscribe so
[583]
you don't miss out on those and whole
[584]
playlist will go over here once I
[586]
finished something else interesting will
[589]
go there in the meantime I promise you
[591]
see ya
[594]
you
Most Recent Videos:
You can go back to the homepage right here: Homepage