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