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