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accounting adjustments
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Danny Leiwy POA Introduction 1
Adjustments to accounts
• Accruals and prepayments
• Inventory/cost of goods sold
• Bad and doubtful debts
• Depreciation
• Sale of non-current assets
• Revaluation
• Taxation
Danny Leiwy POA Introduction 2
Accruals concept Matching up of expenses with associated
revenue insofar as a relationship can be
established between cost and revenue and
regardless on when cash is received or paid
Adjustments at year end for:
Accrued expenses: incurred during year 1 but
charged and paid in year 2
Prepayments: expenses paid in year 1 but
consumed in year 2
Danny Leiwy POA Introduction 3
Example Company begins trading on 1 Jan 13, with an
accounting year ending 31 Dec 13
Electricity paid: Insurance paid:
billed quarterly billed 1/2 yearly
in arrears: in advance:
to 31.1.13 50 to 31.3.13 500
to 30.4.13 170
to 31.7 13 130 to 30.9.13 1,500
to 31.10.13 100
to 31.01.14 150 to 31.3.14 1,500
Danny Leiwy POA Introduction 4
Electricity/Insurance
1. Increase in accrual
Dr: expense
Cr: accrued charges
2. Increase in prepayment
Dr: Prepayments
Cr: expense
Danny Leiwy POA Introduction 5
Inventory
Matching costs with associated
revenues. Revenues from year
end inventory will arise next
year, so the cost will be charged
in Income Statement next year
Danny Leiwy POA Introduction 6
Inventory/COGS Q1: Opening stock: 100 t-shirts
Purchases: 1,200 t-shirts
Closing stock: 350 t-shirts
Q: how many did we sell?
________________________________________________
Q2: year 1 year 2 year 3
sales $20,000 $50,000 $70,000
purchases $15,000 $35,000 $52,000
year end inventory $1,500 $12,000 $16,000
Qs: for each year: calculate:
a) cost of goods sold
b) gross profit
Danny Leiwy POA Introduction 7
Inventory/Cost of goods sold
1. Rename: ‘Purchases’ as ‘Cost of goods
sold’
2. Dr: COGS & Cr: Inventory
with the opening inventory
3. Dr: Inventory & Cr: COGS
with the closing inventory
Danny Leiwy POA Introduction 8
Other issues
• Lower of ‘Cost’ and ‘Net realisable value’
• FIFO/LIFO/AVCO
• Mark-up and Margin
POA Introduction 9
Bad and doubtful debts
List of trade receivables
Armstrong 50
Graham 60
Radford 70
Kennedy 80
George 90
350
Danny Leiwy
POA Introduction 10
Bad and doubtful debts
• bad debts written off
• general provision for bad debts (usually a %)
• bad debt recovered
Danny Leiwy
POA Introduction 11
Bad debts/provisions: double-entry 1. Bad debt w/o:
Dr: Bad debt expenses
Cr: Trade receivables
2. Increase in provision
Dr: Bad debt expense
Cr: Provision for bad debts
3. Bad debt recovered
Dr Cash
Cr Bed debt expense
Danny Leiwy
POA Introduction 12
Depreciation
Measure of the wearing out,
consumption or other loss of
value of a non-CA whether
arising from:
• use
• effluxion of time
• obsolescence through
technological or market changes Danny Leiwy
POA Introduction 13
•Useful economic life
• the period over which the present
owner will derive economic benefits
therefrom
Danny Leiwy
POA Introduction 14
•Rationale
• to allocate the cost (less residual value)
of the non-CA to Income Statement
account over its useful economic life,
reducing its Net Book Value by the
same amount in accordance with the
accruals concept
Danny Leiwy
POA Introduction 15
•Determination of Cost
• invoice cost
• cost of getting non-CA to condition for
use
eg transport charges
associated building costs
Danny Leiwy
POA Introduction 16
Calculation of annual depn
Cost (C) = $12,000
Expected residual value (S) = $2,000
Expected life (n) = 5 years
Danny Leiwy
POA Introduction 17
Straight-line method
Depreciation = c - s
n
= 12 - 2
5
= $2,000 pa where: c= cost
s = scrap or residual value
n = number of year useful economic life
Danny Leiwy
Reducing balance method
Suppose the rate is 30%:
Apply the rate to the net book value to
determine this year’s depreciation expense
Danny Leiwy POA Introduction 18
POA Introduction 19
Reducing balance method year 1 12,000
depn 3,600
nbv (1) 8,400
depn (2) 2,520
nbv(2) 5,880
depn (3) 1,764
nbv (3) 4,116
depn (4) 1,215
nbv (4) 2,881
depn (5) 864
nbv (5) 2,017 Danny Leiwy
POA Introduction 20
Accounting entries
• Dr: depreciation expense
• Cr: accumulated depreciation
Danny Leiwy
POA Introduction 21
Disposal of non-CA
• Sale in year 4 for $5,400
• Sale in year 4 for $6,400
Dr: Disposal account with cost
Cr: Cost of non-CA with its cost
Dr: Acc Depn with its accumulated depn
Cr: Disposal account with acc depn
Dr: Cash with proceeds of sale
Cr: Disposal account with proceeds of sale
Danny Leiwy
POA Introduction 22
Revaluation of non- CA
Cost = $100k
Accumulated depn = $40k
Net book value = $60k
Revalue to $150k
Danny Leiwy
In Year 2 (y/e 31.12.14)
$
Electricity paid 540 to 30.11 14
accrued 45 at 31.12.13
Insurance paid 4,000 to 31.03.15
prepaid 1,000 at 31.12.13
Receivables 500 at 31.12.14
Bad debt provision 16% at 31.12.14
Danny Leiwy POA Introduction 23
POA Introduction 24
Interest and Tax
year 1 year 2
$ $
Operating profit 11m 21m
Interest payable 1m 3m
Profit before tax 10m 18m
Corporation tax 3m 6m
Profit for year 7m 12m
Note (i): Usually, the tax expense for any given year is also a current
liability in the S of FP
Note (ii): Under and overprovisions for tax
Danny Leiwy
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