by s.k chik. accruals and deferrals 1) accrued expenses (expenses owing) –expenses due and unpaid...
TRANSCRIPT
By S.K Chik
Accruals and Deferrals
1) Accrued Expenses (Expenses Owing)– Expenses due and unpaid at the end of the period– Transfer it to the P & L and shown as a liability in the balance
sheet
• E.g. Advertising accrued $100 as at 31 December 20X6, in addition to $500 paid for the year.
20X6 $
Dec 31 Profit and loss 600
600
19X2
Jan 1 Accrued b /d 100
20X6 $
Dec 31 Bank 500
Accrued c /d 100
600
Advertising
2) Accrued Revenues (Income Receivable)– Revenues not yet received at the end of the period– Transfer it to the P & L and shown as an asset in the
balance sheet• E.g. Rent $1,100received for 11 months up to 30
November 20X6.
20X6 $
Dec 31 Bank 1,100
Receivable c /d 100
1,200
20X6 $
Dec 31 Profit and loss 1,200
1,200
19X2
Jan 1 Receivable b /d 100
Rent Received
3) Prepayments (Expenses Paid in Advance)– Expenses paid for the following period– Transfer it to the P & L and shown as an asset in the
balance sheet• E.g. Insurance $1,000 paid in the year, of which
$250 is unexpired as at 31 December 20X6
20X6 $
Dec 31 Profit and loss 750
Prepaid c /d 250
1,000
20X6 $
Dec 31 Bank 1,000
1,000
19X2
Jan 1 Prepaid b /d 250
Insurance
4) Deferred Revenues (Income Received in Advance)– Revenues received relating to the following
period– Transfer it to the P & L and shown as a
liability in the balance sheet
Depreciation and Disposal of Assets
• Depreciation– Is the part of the cost of the fixed asset consumed
during its period of use by the firm– Debit into P & L as a expense
• Cause:1) Physical deterioration
2) Obsolescence (out-dated)
3) Inadequacy
4) Depletion
5) Amortization
Methods of Calculating Depreciation
• Straight Line Method– A fixed amount of depreciation is charged
each year
Depreciation =Cost of asset – Estimated scrap value
Estimated life of asset
• Reducing Balance Method– A percentage of the written down value of the
fixed asset is charged each year
Example
Mr. Foo purchased a new machine of $5,000 for his factory on 1 June 19X1. The year ended of his business is 31 May. Mr. Foo wrote off depreciation directly to the machinery account under the reducing balance method at 10% per annum.
(i) Prepare the following accounts:
a) machinery, and
b) Provision for depreciation on machinery.
(ii) Show the extract of the balance sheet as at 31 May 19X2, 19X3 and 19X4.
Solution:
Machinery
19X1 $
Jun 1 Bank 5,000
Provision for Depreciation- Machinery
19X2 $
May 31 Profit and loss 500
Jun 1 Bal b /d 500
19X3
May 31 Profit and loss 450
950
Jun 1 Bal b /d 950
19X4
May 31 Profit and loss 405
1,355
Jun 1 Bal b /d 1,355
19X2 $
May 31 Bal c /d 500
19X3
May 31 Bal c /d 950
950
19X4
May 31 Bal c /d 1,355
1,355
(5,000 – 500)X 0.1
(5,000 – 950)X 0.1
5,000 X 0.1
Balance Sheet (Extract) as at 31 May
19X2 19X3 19X4
Machinery 5,000 5,000 5,000
Less: Provision for depreciation 500 950 1,355
4,500 4,050 3,645
Disposal of AssetsThe machine was sold on 2 June 19X4 for $4,000. Draw up the accounts for the year ended 31 May 19X5.
Solution:
Machinery
19X1 $
Jun 1 Bank 5,000
19X1 $
Jun 2 Disposal of machinery 5,000
Provision for Depreciation- Machinery
19X1 $
Jun 2 Disposal of machinery 1,355
19X1 $
Jun 1 Bal b/ d 1,355
19X4 $
Jun 2 Provision for
depreciation 1,355
Bank 4,000
5,355
19X4 $
Jun 2 Machinery 5,000
19X5
May 31 Profit and loss 355
5,355
Disposal of Machinery
Provision for Bad Debts
• Bad Debts– When the debt becomes irrecoverable it is
written off as bad– Dr. Bad debts Cr. Debtors
• At the end of the financial year, the total of the bad debts will be closed to the profit and loss account– Dr. P & L Cr. Bad debts
Provision for Bad and Doubtful Debts
• The bad debt is known cost to the business.
• But an adjustment should be made as a provision on the closing value of debtors to anticipate possible losses, typically on a percentage basis.
Dr. profit and loss account (with amount of provision increased)
Cr. Provision for bad debts account
Dr. Provision for bad debts account
Cr. profit and loss account (with amount of provision decreased)
Debtors account showed the year- end balances and provision for bad debts was made on these debtors as follow
Year $ % on debtors
1 80,000 10%
2 100,000 10%
3 88,000 8%
Example:
Year 1 $
Dec 31 Bal c /d 8,000
Year 2
Dec 31 Bal c /d 10,000
10,000
Year 3
Dec 31 Profit and loss 2,960
Bal c /d 7,040
10,000
Year 1 $
Dec 31 Profit and loss 8,000
Year 2
Jan 1 Bal b /d 8,000
Dec 31 Profit and loss 2,000
10,000
Year 3
Jan 1 Bal b /d 10,000
10,000
Year 4
Jan 1 Bal b /d 7,040
Provision for Bad Debts
Year 1 $
Increase in
Provision for bad debt 8,000
Year 2 $
Increase in
Provision for bad debt 2,000
Year 3 $
Decrease in
Provision for bad debt 2,960
Profit and Loss Account
for the year ended 31 December
Balance Sheet (Extract) as at 31 December
Year 1 Year 2 Year 3
Debtors 80,000 100,000 88,000
Less: Provision for bad debts 8,000 10,000 7,040
72,000 90,000 80,960
Bad Debts Recovered
• When a debt previously written off as bad is subsequently paid,
• the debt may first be reinstated in the personal account,
• and then the receipt of cash is recorded through the personal account.
• A bad debts recovered account should be opened as a revenue in the period.
Dr. personal account (debtor)
Cr. Bad debt recovered account
Dr. bank
Cr. Personal account
Double entries of bad debt recovered