FAC1502 Adjustments and Closing Off Procedures Notes

8/16/2019 FAC1502 Adjustments and Closing Off Procedures Notes

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GROUP 3E

FAC1502-SEMESTER 01-2016

UNISA

ADJUSTMENTS &

CLOSING OFF PROCEDURES PREPARED BY E-TUTOR – MR RAMASHAU ALUWANI

2016-03-08 UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E 1





INTRODUCTION

Dear members

Study unit 6 and 7 is one of the critical topics which areintegrated in the exam and it is important that you master thistopics.

Let me know if you need clarity on any issues

Kind regards

Mr. Ramashau Aluwani

E-Tutor: FAC 1502 (Group 3E)"We become what we think about most of the time, and that's the strangestsecret." Earl Nightingale






ADJUSTMENTS

Prepaid Expenses

• Is an expense which has been paid during the current

financial period, where all or part of the expense

relates to a future financial period.

• Insurance and advertising are good examples of such

expenses.

•

Prepaid expenses are shown as current assets in theStatement of Financial Position




ADJUSTMENTS

Accrued expenses

• These are expenses which have been incurred by an

entity but which have not yet been paid by the end

of the accounting period.

• Examples: Salaries, Rent expense, Telephone, Water

& Electricity, Interest on Loan etc.

•

In arrears, outstanding, due , not yet paid.• Accrued expenses are shown as current liabilities in

the Statement of Financial Position




ADJUSTMENTS

Consumable stores on hand

• You mighty have wondered why items such as

stationery are classified as expenses.

• Surely stationery has value, the reason it is regarded

as an expense and not an asset, is because it is used

up (consumed) within the entity within one year.

•

Examples : Stationery, Packaging materials etc.• The stationary on hand is an asset is shown in the

Statement of financial position under current assets.




ADJUSTMENTS

Income received in advance• Income which has been received during the current

financial period but relates to a future financial period

• Only the portion relating to the current financial period

must be recorded as income, and an adjustment isnecessary for the portion received in advance.

• Income received in advance is not yet earned so it mustbe deducted from total income to arrive at the correctincome earned during the financial year.

• Examples: Rent Income, Commission received etc.

• Income received in advance is shown in the Statement ofFinancial Position under current liabilities




ADJUSTMENTS

Accrued income

• This is income earned by the entity in respect of

services rendered but for which no payment has

been received

• Examples : Commission income, Rent income,

Interest on fixed deposit etc.

•

Accrued income is shown in the Statement ofFinancial Position under current assets




ADJUSTMENTS Credit Losses

• Any entity grants credit to its customers runs the risk ofhaving some of those customers not paying their debts.

• If it is expected that the amount due will not be paid by a

customer, then this amount must be removed from the

debtors control.

• The amount written off is disclosed as an expense in the profit

or loss account

• When a debt is written off, the customers individual account

in the debtors subsidiary ledger and then also the debtorscontrol account in the general ledger is credited.

• The amount is debited to a credit losses account (an expense

account) which is closed off to the profit or loss account




ADJUSTMENTS

Allowance for credit losses• In order to show the correct amount of total debtors on the

statement of financial position, it is prudent for the entity toestimate how much of the debts owed to it will be paid.

•

When an allowance for credit losses is created or increased,the credit losses account (expense) is debited and allowancefor credit losses account is credited

• In the statement of financial position, the allowance for creditlosses is disclosed by deducting it from the debtors controlbalance.

• It is shown as part of trade and other receivables in theStatement of Financial Position




ADJUSTMENTS

Depreciation• When an entity buys an asset which is intended

to be used in the entity for more than onefinancial year, that asset is described as non-

current asset.• The loss of value is known as depreciation

• Depreciation is calculated for each accountingperiod using an agreed method of depreciation

• Depreciation is an expense which allows formatching of the original cost of the non-currentasset against income generated by the asset




Example of Journal Entries

Debit Credit

Prepaid Expense (B/S) xxx

Insurance (I/S) xxx

Telephone/Salaries (I/S) xxx

Accrued Expenses (B/S) xxx

Inventory: Stationery (B/S) xxx

Stationery (I/S) xxx

Rent Income (I/S) xxx

Income Received in Advance (B/S) xxx

Take Note: I/S – To be transferred to Statement of Comprehensive Income




Example of Journal Entries continueDebit Credit

Accrued Income (B/S) xxxCommission income (I/S) xxx

Credit Loss (I/S) xxx

Debtors Control (B/S) xxx

Credit Loss (I/S) xxx

Allowances on Credit Losses (B/S) xxx

Depreciation (I/S) xxxAccumulated Depreciation (B/S) xxx

Take Note: B/S – To be transferred to Statement of Financial Position (Balance Sheet)




STUDY UNIT 7 – CLOSING OFF

PROCEDURES

INVENTORY SYSTEMS (TRADING INVENTORY)

• PERPETUAL INVENTORY SYSTEM

• PERIODIC INVENTORY SYSTEM




PERPETUAL INVENTORY SYSTEM

• The business keep a continuous track of inventorylevels for the different inventory items it sells.

• Ideally suited to a business that sells items thatcan be easily identified, measured and a valueattached to them.

• Purchase of inventory is recorded directly into theinventory account at cost price

•

At time of sale, the cost price is transferred fromthe inventory account to the cost of salesaccount.




PERPETUAL INVENTORY SYSTEM

• Cost of sales is determined with every salestransaction: Debit: Cost of sales, Credit:Inventory with the cost value of the sales

• No purchases or purchases returns accountsare kept

• A physical inventory count will only disclose

shortages (or surpluses) in inventory• Refer to page 121 of the Study Guide (Golden

rules)




PERIODIC INVENTORY SYSTEM

• The purchase of inventory is recorded in thepurchases account and not an inventoryaccount.

•Inventory returned - recorded in a purchasesreturns account.

• Cost of sales is not determined at the time ofthe recording of the sale but can thus only be

determined at the end of the financial periodafter a physical inventory count has beendone.




PERIODIC INVENTORY SYSTEM

• A purchases and purchases returns accounts

are kept

• No cost of sales account is kept. Cost of sales

is determined via entries in the Trading

account

• A physical inventory count is essential.

• For more info refer to page 125 of the Study

Guide (Golden rules)




CLOSING OFF OF NOMINAL ACCOUNTS

• To determine the financial result of an entity, the nominal accounts are

closed by means of closing journals and transferred to the trading account(a nominal account) in the case of trading entities and/or to the profit orloss account.

• The gross profit, as determined, is debited to the trading account andcredited to the profit or loss account (a nominal account) .

• All the other nominal accounts with balances such as commission income,

rent income, discount received, telephone expenses, water & electricityand salaries are (closed off) and the profit or loss account is accordinglydebited or credited.

• The difference between the debit and credit sides of the profit or lossaccount results in the profit or loss which is, in turn, transferred to thecapital account.

• The profit or loss account is therefore, also closed off.• All nominal accounts MUST be closed off (made NIL) at the end of the

financial period to either the Trading account or Profit or Loss account.

• For more info read from page 128 of your Study Guide




TRIAL BALANCEA Trial Balance is a list of debit and credit balances taken from the general

ledger accounts. It is divided into two sections, namely a financial position

section and a nominal account section.

• Pre-adjustment trial balance

o Test the correctness of the entries after the posting from subsidiary journals to

the general ledger

o Test the requirements of the double-entry principle have been met

• Post-adjustment trial balance

o Is complied after the all journalised adjustments have been posted to the

general ledger.

• Post-closing trial balance

o Is complied after the closing journal entries have been posted to the ledger.

o all the nominal accounts are closed and the profit or loss as well as drawings

are transferred to the capital account.

o All that remains in the trial balance are the assets, liabilities and equity

accounts (Refer to page 110 of your Study Guide )




TIPS

• In the exam you are expected to know the principlesand Structure or Format of the financial statements.

• You may be asked to pass journals (adjustments) orto take adjustments into considerations. Refer to

Previous Exam paper.• There is a similar integrated example in the study

guide and I would like you to do before you attemptthe previous question papers.

•

NB. You will be required to answer all questions inexam within two hours. Prepare yourself now!!!




INTEGRATED EXAMPLE:

EX.2 - STUDY GUIDE (PAGE 293)

ADDITIONAL INFORMATION:

(a) Stationery on hand at 28 February 20.1, R150.

(b) An allowance for credit losses of R405 on

outstanding trade debtors' balances must be created.(c) Rent income amounts to R1 500 per month and the

rental has been charged for the full financial year.

(d) Provide for interest still outstanding on mortgage

bond.(e) Provide for depreciation on furniture and fittings at

15% per annum on cost price.






MUST KNOWIN EXAM YOU MAY BE EXPECTED TO PREPARE THE FOLLOWING:

• JOURNAL ENTRIES TO BRING ADJUSTMENTS INTO ACCOUNT

• CLOSING JOURNAL ENTRIES (CLOSING TRANSFERS)

• PREPARE GENERAL LEDGER

–

E.G TRADING ACCOUNT & PROFIT OR LOSS ACCOUNT IN THEGENERAL LEDGER

• STATEMENT OF PROFIT AND LOSS & OTHER

COMPREHENSIVE INCOME

• STATEMENT OF CHANGES IN EQUITY

• STATEMENT OF FINANCIAL POSITION

• NOTE TO FINANCIAL STATEMENT: PPE

“PRACTICE, PRACTICE & PRACTICE MAKES IT PERMANENT”




MUST DO EXERCISES

STUDY GUIDE• 6.5 REVISION EXERCISE (PG 110-111)

• INTEGRATED EXAMPLE (PG 143 -144)

• REVISION EXERCISE 5 (PG 157)• REVISION EXERCISE 8 (PG 163)

• EXERCISE 15.2 (PG 290)




MUST DO EXERCISES

PREVIOUS EXAM QUESTION PAPERS

• QUESTION 1 (MAY-JUNE 2013)

• QUESTION 3 (OCT-NOV 2013)

• QUESTION 1 (MAY-JUNE 2014)

• QUESTION 3 (OCT-NOV 2014)




SELF ASSESSMENT

NO. TOPIC STATUS1. STUDY UNIT 1 -5 Done

2. STUDY UNIT 6- ADJUSTMENTS Done

3. STUDY UNIT 7- CLOSING OFF PROCEDURES Done

4. ASSIGNMENT NO.1 Done




INSPIRATIONAL POEMThere is inside youAll of the potential

To be whatever you want to be,All of the energy To do whatever you want to do.

Imagine yourself as you would like to be,Doing what you want to do,And each day, take one step

Towards your dream.And though at times it may seem too

difficult to continue,Hold on to your dream.

One morning you will awake to find

That you are the person you dreamed of,Doing what you wanted to do,Simply because you had the courage

To believe in your potential And to hold on to your dream. by: Donna Levine




KEEP IT UP!

THANK YOU!!!


Documents

FAC1502 Adjustments and Closing Off Procedures Notes