Accounting
The necessity for the adjusting entries
An adjusting entry is an accounting periodical entry used to convert the accounting records of a company to accounting accrual root. It is designable prior to issuance of the financial records of a company (Adjusting, 2010). The two occasions when adjusting entries is required before any financial statement:
• The accounting record for certain expenses and revenues is empty neither did these revenues and expenses occur. It has to be inclusive to the existing balance sheet and the income statement phase.
• When the accounting records have something and there is need to divide the amount amongst two or more accounting periods.
Adjusting entries involves
• Income statement account including insurance expense, interest expense and service revenues
A balance sheet account including prepaid insurance, interest payable and accounts receivable
Adjusting entries are necessary because, after the net profit or loss, the company’s financial situation is recognizable in the accounting period. The accountant has to ensure to pass them on the occurrence of any financial entry (Adjusting, 2010). The closing reserve entry in adjustment entry is required in the determination of the accurate gross profit value and the goods sold rate. After initializing the adjustment entry, the credit column will have the closing stock in the trading account, and afterwards calculation of gross profit can take place (Adjusting, 2010). The adjustment entry is necessary in that:
• Depreciation in the adjusting entry is required indetermination of the correct net profit value, financial position and net profit value. This entry cannot be conceded regularly, hence the depreciation that comes after the exploit of fixed asset.
• Creating adjustment entry of the expenses that are outstanding is significant since it will indicate the correct amount allocation to the third party. It will also indicate the period accurate expenses since this entry falls in the third party’s credit outstanding expense and debit expense account.
• Making advance expense entries is also of significance. This is that it enables the deduction of advance expense from actual expense hence making it easier to be charged in the subsequent accounting period following the expense due period.
• Accrual revenue entry in the adjustment entry and advance is of importance compared to advance expenses and outstanding expenses. This is because its direct effect will be in the final account. Accrual or unearned revenue means the revenue earned but yet to be settled in cash. Recording it in adjustment entry in the present period respectively indicates accurate net profit. Unearned or advance revenue adjusting entry is credit advance revenue and debit revenue account respectively (Albrecht, 2011). This means a decrease in the revenue value with the similar amount in loss and profit account since both are credit following the third rule of nominal account. This entry is useful since shows revenue when earning in the next period of accounting (Albrecht, 2011).
Adjusting entries are frequently prepared at the closing period end to make adjustments to account balance. This is obligatory mostly for the achievement of a clean cut-off at any accounting period end to ensure accounts are correct and complete. A case is after any amount entry is on the wrong accounts and difference in timing in recognition to expenses and revenue linking the cash basis and accrual accounting (Adjusting JE, 2010). They are permanent or temporary (Albrecht, 2011).
Four categories of adjusting entries, and a manufacturing industry illustration of each
The essential types of adjusting entries include:
1. Accrued revenue
It is also known as accrued assets. They are revenues earned already but are to be in a general ledger or to be paid by a customer. An example is a custom ordered machine shipped already by FOB shipping spot on the immediate date the accounts receivable module is already closed. This happens while the approval of billing the customer is not yet in the hands of the billing clerk. Adjusting entry is recorded to identify the revenue in the accurate period. The entry reverses upon customer invoice appropriation (Albrecht, 2011).
2. Unearned revenue
It is also known as the deferred value given in cash and indicated as liabilities aforementioned to being earned. It is a liability to the individual until the earning of the revenue. Example, when a customer of a company pays a deposit for an ordered machine on custom and has not been delivered; the deposit is indicated as unearned revenue. This adjusting entry is affected by another entry (Albrecht, 2011).
3. Accrued expenses
It is also identified as accrued liability. They are expenses incurred already but not paid yet or recorded. Example, a payroll earned by an employee on the final day of a period but is unpaid until come the next payroll time. The entries normally reverse the month e.g. salary expense-57,000 while salary payable 57,000.
4. Prepaid expenses
Also known as, differed expenses are settled in cash put in records as assets prior to their usage. An example of this adjusting entry is the used part of an insurance premium. They are frequently enduring adjusting entry. Other adjusting entry is unacceptable debt allowances, fixed assets depreciation and the inventory adjustments (Albrecht, 2011).
Computerized accounting system recording of the entries
When coming to end of a closing period, specifically monthly, a scrupulous analysis exercised in the trial balance. The analysis includes month-to-month actual budget performance to make certain the correct stating of the accounts. Following the identification of an adjustment entry, a preparation of adjusting entry input outline follows (Kimmel et al, 2011). The form is supposed to be supported with accurate source documents to ensure justification of the entry, reviewing and approval by appropriate structure of accounting management. Following the obtaining of the approval, the adjusting entry is keyed into the system of general ledger as either self-reversing adjusting entry or standard journal entry. Posting to the general ledger follows (Albrecht, 2011).
One ethical issue that results from the preparation of these manufacturing entries
Adjusting entries are the perfect way for the management to stage-manage a manipulation of financial results. This is through accruing more expense or revenue than the appropriate and for any swindler to conceal skimming known as misappropriation of cash. It is of tremendous significance to get to comprehend of each adjusting entry to be fully approved and supported. This is a vital ethical issue in the manufacturing adjusting entries (Kimmel et al, 2011).
Four main financial statements of Emirates Airlines Group
The Emirates Group financial statement as at 31 March 2012
Revenue
2011-2012
AED m 2010-2011
AED m % change
Passenger 48,950 41,415 18.2
Cargo 9,546 8,803 8.4
Excess baggage 332 293 13.3
Transport revenue 58,828 50,511 16.5
Sale of goods 2,017 1,774 13.7
Destination and leisure 245 226 8.4
Other 418 434 3.7
total 61,508 52,945 16.2
The Emirates Group revenue rose past AED 60 billion score growing 16.2% to AED 61,508 million.
Expenditure
2011-2012
AED m 2010-2011
AED m % change 2011-2012 % of operation costs
Jet fuel 24,292 16,820 44.4 40.2
Employee 7,936 7,615 4.2 13.2
Aircraft operating leases 4,788 4,317 10.9 7.9
Depreciation 4,053 3,600 12.6 6.7
Sales and marketing 4,023 3,862 4.2 6.7
Handling 3,584 3,137 14.2 5.9
In-flight catering and related costs 2,836 2,305 23.0 4.7
Overflying 1,878 1,620 15.9 3.1
Office accommodation and IT costs 1,450 1,281 13.2 2.4
Aircraft maintenance 1,296 1,030 25.8 2.1
Landing and parking 1,128 974 15.8 1.9
Cost of goods sold 926 839 10.4 1.5
Amortization 81 77 5.2 0.1
Corporate overheads 2,203 1,311 68.0 3.6
Total operating costs 60,474 48,788 24.0 100.0
Consolidated financial position statement as at 31 March 2012
Assets
Note 2012
AED m 2011
AED m
ASSETS
Non-current assets
Property, plant and equipment 11 49,198 39,848
Intangible assets 12 902 901
Investments in associates and joint ventures 13 430 386
Advance lease rentals 14 370 384
Loans and other receivables 15 917 1,704
Derivative financial instruments 33 69 –
Differed income tax asset 27 10 –
51,896 43,223
Current assets
Inventories 16 1,469 1,290
Trade and other receivables 17 8,126 6,481
Derivative financial instruments 33 8 123
Short term bank deposits 31 8,055 3,777
Cash and cash equivalents 31 7,532 10,196
25,190 21,867
Total assets 77,086 65,090
Equity and Liabilities
Capital and reserves Note 2012
AED m 2011
AED m
Capital 18 801 801
Retained earnings 21,256 20,370
Other reserves 19 833 565
Attributable to Emirates’ owner 21,466 20,606
Non-controlling interests 242 207
Total equity 21,466 20,813
Non-current liabilities
Borrowings and lease liabilities 20 26,843 20,502
Retirement benefit obligations 24 631 479
Deffered revenue 25 1,074 930
Deffered credits 26 350 401
Deffered income tax liability 27 2
Trade and other payables 28 31
Derivative financial instruments 33 957 642
29,855 22,987
Current liabilities
Trade and other payables 28 20,601 17551
Income tax liabilities 36 22
Borrowings and lease liabilities 20 4,037 2,728
Deffered revenue 25 915 792
Deffered credits 26 136 136
Derivative financial instruments 33 40 61
25,765 21,290
Total liabilities 55,620 44,277
Total equity and liabilities 77,086 65,090
A flow chart illustrating steps in the accounting cycle
Emirates has continued to invest much in its revenue generating assets with capital expenditure during the financial period majorly on key overhauls, aircraft and spare engines comprising of 91%. Its operating cost grows quicker than revenue increase in an operating margin of 2.9%-28.4% during financial year 2010-2011 (Kimmel et al, 2011).
References
Adjusting, JE. (2010). Adjusting journal entries. Retrieved from
http://accountinginfo.com/study/je/aje/index.htm
Adjusting, EN. (2010). Adjusting entries in accounting. Retrieved from
http://www.college-cram.com/study/accounting/accounting-cycle/adjusting-entries-in-accounting
Albrecht, W. S. (2011). Accounting, concepts & applications: What, why, how of accounting. Mason, OH: South-Western/Cengage Learning.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business decision making, study guide. Hoboken, N.J: Wiley.
