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Adjustments for Final Accounts. Prepayments and Accruals. Expenses and revenues are not always paid or received on time. Cash paid and received in a year should not be entered directly into the profit and loss account of that year. Adjustment should be made. Prepaid expenses - PowerPoint PPT Presentation
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Adjustments for Final Accounts
Prepayments and Accruals
Expenses and revenues are not always paid or received on time.
Cash paid and received in a year should not be entered directly into the profit and loss account of that year.
Adjustment should be made.
Prepaid expenses those to be used in the following period but have
been paid for in advance.
Accrued expenses those which have been used up in the current
year, but have not yet been paid for.
Prepaid income those to be earned in the following period but have
been received in advance.
Accrued income those which have been earned in the current
period but have not yet been received.
Example2 firms who pay rent for buildings in Hong Kong. The rent for each building is $1,200 a year.
1. Firm A paid $1,00 in the year. Own $200 for rent.
2. Firm B paid $1,300 in the year. $100 in advance for the following year.
P & L accounts for 12 months needs 12 months rent as an expense = $1,200.
1. Firm A, $200 accrued expenses be adjusted.
2. Firm B, $100 prepaid expenses be adjusted
Accrued Expenses
Accrued expensesAssume that rent of $1,000 per year is payable at the end of every 3 months.
The rent was not always paid on time
Amount Rent due Rent paid
$250 31 March 2005 31 March 2005
$250 30 June 2005 2 July 2005
$250 30 Sept. 2005 4 Oct. 2005
$250 31 Dec. 2005 5 January 2006
Rent2005 $ 2005 $
Mar 31 Bank 250 Dec 31 Profit and loss 1,000
Dec 31 Accrued c/d 250
Jan 1 Accrued b/d 250
2006
1,000 1,000
Jul 2 Bank 250
Oct 4 Bank 250
Prepaid Expenses
Prepaid expensesInsurance for a firm is at the rate $840 a year, starting from 11 January 2005.The firm has agreed to pay this at the rate of $210 every 3 months.
Amount Insurance due Insurance paid
$210 31 March 2005 $210 28 Feb 2005
$210 30 June 2005$420 31 Aug. 2005
$210 30 Sept. 2005
$210 31 Dec. 2005 $420 18 Nov. 2005
Insurance2005 $ 2005 $
Feb 28 Bank 210 Dec 31 Profit and loss 840
Aug 31 Bank 420
Nov 18 Bank 420
2006
Jan 1 Prepaid b/d 210
1,050
Dec 31 Prepaid c/d 210
1,050
Prepayment will also happen when items other than purchases are bought for use in the business, and they are not fully used up in the period.
For instance, stationery is normally not entirely used up over the period in which it is bought.
ExampleYear ended 31 December 2005
Stationery bought in the year $2,200
Stock of stationery in hand as at 31 December 2005 $400
Stationery2005 $ 2005 $
Dec 31 Bank 2,200 Dec 31 Profit and loss 1,800
The stock of stationery is not added to the stock of unsold goods in hand in the balance sheet, but is added to the other prepayments of expense.
2,2002006
Jan 1 Stock b/d 400
Dec 31 Stock c/d 400
2,200
Accrued Income
Accrued incomeAssumed our warehouse is larger than we need. We rent part of it to another firm for $800 per annum.
Amount Rent due Rent received
$200 31 March 2005 4 April 2005
$200 30 June 2005 6 July 2005
$200 30 Sept. 2005 9 Oct. 2005
$200 31 Dec. 2005 7 Jan. 2006
Rent receivable2005 $ 2005 $
Dec 31 Profit and Loss 800 Apr 5 Bank 200 Jul 6 Bank 200
Oct 9 Bank 200
Dec 31 Accrued c/d 200
800
2006
Jan 1 Accrued b/d 210
800
Expenses and revenue accounts covering more than one period
Example:
On 31 Dec. 2004 3 months rent of $3,000 was owing.
The rent chargeable per year was $12,000.
The following payments were made in the year 2005: 6 Jan. $3,000; 4 April $3,000; 7 July $3,000; 18 Oct $3,000
The final 3 months rent for 2005 is still owing.
Rent2005 $ 2005 $
Jan 1 Owing b/d 3,000Jan 6 Bank 3,000Apr 4 Bank 3,000
Jul 7 Bank 3,000Oct 18 Bank 3,000
Dec 31 Owing c/d 3,000
Dec 31 Profit and loss 12,000
15,00015,000
2006Jan 1 Owning b/d 3000
ExampleRent and rates are joined together.
Rent is payable of 6000 per annum
Rates of $4,000 per annum are payable by instalments.
At 1 Jan 20x5 rent $1,000 had been prepaid in 20x4.
On 1 Jan 20x5 rates were owned of $400.
During 20x5 rent was paid $4,500.
During 20x5 rates were paid $5,000.
On 31 Dec 20x5 rent $500 was owing.
On 31 Dec 20x5 rates of $600 had been prepaid.
Rent and Rates2005 $ 2005 $
Jan 1 Rates owing b/d 400Jan 1 Rent prepaid b/d 1,000
Dec 31 Bank: rent 4,500
Dec 31 Bank: rates 5,000
Dec 31 Owing c/d 500
Dec 31 Profit and loss 10,000
Dec 31 Rates prepaid c/d 600
11,000 11,000
Jan 1 Owing b/d 500
20062006Jan 1 Prepaid b/d 600
Expenses for the period= Cash paid – Accruals in last year + Accr
uals in this year + Prepayments in last year – Prepayment in this year
Income for the period= Receipt – Accruals in last year + Accrua
ls in this year + Prepayments in last year – Prepayments in this year
Trading and Profit and Loss Account
Gross profit / loss
= Net sales – Cost of goods soldNet sale
= Sales – Returns Inwards
Cost of goods sold
= Opening stock + [Purchase + Carriage inwards – Returns outwards + other purchase costs] – Closing stock
Net Profit
= Gross profit + Other income – Total expenses
Name of the CompanyTrading and Profit and Loss Account for the year ended 31 Dec 19xx
$ $ $Sales xLess Returns Inwards x
xLess cost of Goods Sold
Opening Stock xPurchases xAdd Carriage Inwards xLess Returns Outwards (x)Less Closing Stock (x) x
Gross Profit x
Add Discount received x Rent Received x Profit on Disposal on M.V. x Decrease in provision for bad debt x
xLess Expenses
Rent and Rates xInsurance xCarriage Outwards xDiscount Allowed xBad debts xIncrease in provision for bad debts xDepreciation xLoss on Disposal of Furniture x x
Net Profit x
Name of the CompanyTrading and Profit and Loss Account for the year ended 31 Dec 19xx
$ $ $Fixed Assets Cost Dep. NetMachinery x x xMotors x x x
x x xInvestment ($x at market value) x
xCurrent AssetsStock xDebtors xLess provision for bad debt (x) xPrepaid expenses xAccrued income xBank xCash x
xLess: Current LiabilitiesCreditors xAccrued expenses xPrepaid income xBank overdrafts xWorking Capital x
x
$ $ $
Financed by:CapitalBal as at 1 Jan 19xx xAdd: Net profit / Less Net loss x
xLess: Drawings x
xLong-term LiabilitiesDebentures xBank Loans x
x
Working capitalWorking capital is the amount by which current assets exceed current liabilities.
DrawingsThey refer to the using up of business resources by the owner(s) of the business.
Accounting entries
Dr DrawingsCr Cash / Bank
drawn from the cash till or business bank account
Dr DrawingsCr Purchases
goods taken by the proprietor
Dr DrawingsCr Expenses
private expenses
Losses of goods
Losses of raw materials and trading stock can be classified
1. normal losses2. abnormal losses
Normal Losses caused by wastage, obsolescence and other reasons which are expected within the ordinary activities of the business.No entry is needed for normal losses.
Normal Loss
Abnormal Loss.
Losses caused by reasons which are unexpected within the ordinary activities of the business such as fire or accidents.These should be recorded in the books as below.
(i) Losses without insurance claim
Dr Fire / Burglary LossCr Trading
With the total loss
Dr Profit and lossCr Fire / Burglary Loss
With the total loss
(ii) Losses with insurance claim
Dr Fire/Burglary LossCr Trading
With the total loss
Dr Bank/Insurance companyCr Fire/Burglary Loss
Insurance claim received
Dr Profit and LossCr Fire / Burglary Loss
Transferring the net loss to profit and loss account at the year end
Example (Normal loss)$
Purchases (100 units) 100
Sales (70 units) 210
Closing stock (20 units) 20
Expenses 50
10 units of goods were obsolete.
Abnormal loss without insurance claimTrading and Profit and Loss Account
$ $ Sales ($3 * 70) 210
____
210
Gross Profit 140
___
140
Purchase ($1 * 100) 100
Less Closing Stock($1*20) 20
80
Less Fire loss 10
Cost of goods sold 70
Gross profit 140
210
Expenses 50
Fire Loss 10
Net Profit 80
140
Abnormal loss with insurance claim ($6)Trading and Profit and Loss Account
$ $ Sales ($3 * 70) 210
____
210
Gross Profit 140
___
140
Purchase ($1 * 100) 100
Less Closing Stock 20
80
Less Fire loss 10
Cost of goods sold 70
Gross profit 140
210
Expenses 50
Fire Loss ($10 - $6) 4
Net Profit 86
140