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Year End Adjustments. By S.K Chik. Advertising. 20X6 $ Dec 31 Bank 500 Accrued c /d 100 600. - PowerPoint PPT Presentation

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  • By S.K Chik

  • Accruals and Deferrals1) Accrued Expenses (Expenses Owing)Expenses due and unpaid at the end of the periodTransfer it to the P & L and shown as a liability in the balance sheetE.g. Advertising accrued $100 as at 31 December 20X6, in addition to $500 paid for the year.

  • 2) Accrued Revenues (Income Receivable)Revenues not yet received at the end of the periodTransfer it to the P & L and shown as an asset in the balance sheetE.g. Rent $1,100received for 11 months up to 30 November 20X6.

  • 3) Prepayments (Expenses Paid in Advance)Expenses paid for the following periodTransfer it to the P & L and shown as an asset in the balance sheetE.g. Insurance $1,000 paid in the year, of which $250 is unexpired as at 31 December 20X6

  • 4) Deferred Revenues (Income Received in Advance)Revenues received relating to the following periodTransfer it to the P & L and shown as a liability in the balance sheet

  • Depreciation and Disposal of AssetsDepreciationIs the part of the cost of the fixed asset consumed during its period of use by the firmDebit into P & L as a expenseCause:Physical deteriorationObsolescence (out-dated)InadequacyDepletionAmortization

  • Methods of Calculating DepreciationStraight Line MethodA fixed amount of depreciation is charged each year

  • Reducing Balance MethodA percentage of the written down value of the fixed asset is charged each year

  • ExampleMr. 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.Prepare the following accounts:machinery, andProvision for depreciation on machinery.Show the extract of the balance sheet as at 31 May 19X2, 19X3 and 19X4.

  • Provision for Depreciation- Machinery19X2 $May 31 Profit and loss 500

    Jun 1 Bal b /d 50019X3May 31 Profit and loss 450 950Jun 1 Bal b /d 95019X4May 31 Profit and loss 405 1,355

    Jun 1 Bal b /d 1,35519X2 $May 31 Bal c /d 500

    19X3May 31 Bal c /d 950 950

    19X4May 31 Bal c /d 1,355 1,355

    (5,000 500)X 0.1(5,000 950)X 0.15,000 X 0.1

  • 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:Machinery19X1 $Jun 1 Bank 5,00019X1 $Jun 2 Disposal of machinery 5,000Provision for Depreciation- Machinery19X1 $Jun 2 Disposal of machinery 1,35519X1 $Jun 1 Bal b/ d 1,355

  • Provision for Bad DebtsBad DebtsWhen the debt becomes irrecoverable it is written off as badDr. Bad debts Cr. DebtorsAt the end of the financial year, the total of the bad debts will be closed to the profit and loss accountDr. P & L Cr. Bad debts

  • Provision for Bad and Doubtful DebtsThe 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 accountDr. Provision for bad debts accountCr. 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 followYear $ % on debtors 1 80,000 10% 2 100,000 10% 3 88,000 8%Example:

  • Year 1 $Increase inProvision for bad debt 8,000Year 2 $Increase inProvision for bad debt 2,000Year 3 $Decrease inProvision for bad debt 2,960Profit and Loss Account for the year ended 31 December

  • Bad Debts RecoveredWhen 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.

  • Double entries of bad debt recoveredDr. personal account (debtor)Cr. Bad debt recovered account

    Dr. bankCr. Personal account