Can someone help clarify a confusing point for me?
Why is it that when accrued liability is incurred or accrued revenue is earnt, sometimes in the General ledger for that revenue or expense item it will either be split up or added on top of the original amount.
For example, in an engage trial exam; they presented you with a pre-adjustment trial balance that said wages was 10,000 and the extra info down the bottom said that 2,000 was outstanding and not paid at the end of the period. When preparing the Wages ledger, the added the 10,000 and 2,000 and closed wages expense of to the p & l summary for 12,000.
In the same exam, another question said that John earnt 6,000 interest revenue and 2,000 was accrued. Now this time the interest revenue was closed to the p&l summary as 6,000 (with cross references bank and accrued interest rev.)
My question is why is it that we split up the amount in some cases and add to the original amount in others ? I'd really appreciate some clarification.
Alright so you have to distinguish between pre adjustment and post adjustment. Pre adjusted is b4 any balance day adjustments to record any revenue earned but not received and any expenses incurred but not paid.
In the first example it is stated that it is a pre adjustment trial balance. That means no adjustments have taken place. So when it says wages is 10000 in the trial balance, this is only the wages expense PAID. The 2000 outstanding is the wages incurred but not paid.
A bda must be done to recognise this
Wages 2000 dr
Accrued wages 2000 cr
Thus in the wages ledger, it will 10000 bank and another 2000 from accrued. Then you transfer this amount to the pl summary.
For the second example, it clearly states that John EARNT 6000 revenue not received, this indicates that this is post adjusted. This 6000 is the total amount after the adjusting entry. So if 2000 was accrued it means 4000 was paid, resulting in the bank and accrued interest cross references.
So basically read the question carefully looking for keywords such as pre adjusted, post, earned, received, incurred and paid.
Hope my poor explanation makes some sort of sense.
EDIT- beaten x 2