Title: Chapter 8 END OF YEAR ADJUSTMENTS
1Chapter 8END OF YEAR ADJUSTMENTS
2Closing off Account
- The balances of ALL expenses and income accounts
are closed off to the Income Statement (Trading
and Profit and Loss Account) at the end of the
accounting period.
3Closing off Accounts
Purchases A/c Purchases A/c Purchases A/c
2000
02-July Delis 375 31 July Income Statement 4 216
02-July Cash 870
02-July Bank 725
02-July F. Bolth 706
18-July Cash 430
18-July F. Bolth 1 110
4 216 4 216
4Closing off Account
Date Details folio Dr. Cr
2000 July 31 Income Statement 4 216
Purchases A/c 4 216
To transfer the purchases account at the end of the period
5Closing off Accounts
Sales A/c
2000
31 July Income Statement 04-July C. Bailey 1 430
04-July B. Hughes 1 620
04-July H. Spencer 1 760
21-July B. Hughes 670
5 480 5 480
6Closing off Account
Date Details folio Dr. Cr
2000 July 31 Sales A/c 5 480
Income Statement 5 480
To transfer the sales account at the end of the period
7Adjustments
- Adjustments are any transactions or events which
were not recorded at the time of preparation of
the Trial Balance - Apart from omitted transactions, many other
adjustments occur as a result of applying the
matching/accrual and realisation concepts - Adjustments must be done before preparing the
Final accounts (Manufacturing, Income Statement
and Balance Sheet) are prepared - Adjustments appear as notes after the Trial
Balance totals.
8Adjustment Income
The Realisation concept states that amount for
income to be used to prepare the Income Statement
is the amount which should be collected from the
sale goods or the provision of services during
the accounting period under review even if cash
has not been collected.
9Adjustment Income
Cash collected during the accounting
period X Add owing at close x Collected in
advance at start x Less Owing at
start (x) Collected in advance at
close (x) Income for the period X
Income collected in advance current liability
Income owing current asset
10Adjustment Income
dr Income Account Income Account cr
Income owing at start x Income in advance at start x
Income Statement (Income for period) x Cash (received) x
Income in advance at close x Income owing at close x
x x
Income in advance current liability
Income owing current asset
NB. Assets and liabilities are also used in the
Balance Sheet
11Adjustment Expense
The matching/accrual concept states that all the
expenses incurred (supposed to be paid) in an
accounting period to produce income should be
recorded in the trading and profit and loss
account even if not paid.
12Adjustment Expense
- The accounting period for which the Income
Statement A/c is to be prepared must be
identified. Pay attention to the date, the month
and the year - If any amount is relevant to the accounting
period then add to cash paid during the same
accounting period - If any amount is not relevant to the accounting
period then subtract from cash paid during the
same accounting period. - A prepayment takes place if the amount of an
expense paid during the accounting period is
greater than the amount to be paid - An accrual takes place when the amount of an
expense actually paid during the accounting
period is less than the amount to be paid.
13Adjustment Expense
Cash paid during the accounting period X Add
owing at close x Paid in advance at
start x Less Owing at start (x) Paid in
advance at close (x) Expense for the
period X
Expense owing current liability
Prepaid expense current asset
14Adjustment Expense
dr Expense Account Expense Account cr
Prepaid expense at start x Expense owing at start x
Cash paid x Income Statement x
Expense owing at close x Prepaid expense at close x
x x
Prepaid expense current asset
Expense owing current liability
NB. Assets and liabilities are also used in the
Balance Sheet
15Adjustment Depreciation
- Fixed or non current assets are resources which
allow a controlling firm to gain economic
benefits over a period of more than one year in
the future - Depreciation is the portion of the cost of a
fixed asset expended or used up during each
accounting period for which the fixed asset is
used or held
16Adjustment Depreciation
- Land used for development and not for mining is
the only fixed asset that is not depreciated. - Depreciation is therefore a non-cash expense.
- The reasons for depreciation are use wear and
tear obsolescence (new model making the old
model out of date) and time.
17Adjustment Depreciation
Estimating annual depreciation charge or expense
The straight line method
either Cost of the fixed asset less estimated
scrap/residual value Estimated useful life of the
fixed asset Or Cost of the fixed asset x
annual rate of the depreciation
18Adjustment Depreciation
Estimating annual depreciation charge or expense
Reducing balance method
Net book value of the fixed asset x annual rate
of the depreciation
Cost of fixed asset less total previous
depreciation expense (aggregate/accumulated/provis
ion for depreciation)
19Adjustment Depreciation
Methods compared
20Adjustment Depreciation
Methods compared
- In the earlier years the annual expense under the
reducing balance is greater than the
straight-line method - While in later years the annual expense under
the reducing balance is less than the
straight-line method. - Using the straight-line method gives a fixed
annual depreciation expense. It is only if the
cost of fixed assets changes that the annual
expense will change.
21Adjustment Depreciation
Double Entry
Date Details folio Dr. Cr
Depreciation expense x
Provision for or accumulated depreciation x
To record the depreciation charge or expense for the period
The balance of the provision for depreciation
account is used in the Balance Sheet as a contra
asset. The account records the sum of annual
depreciation charge from the date of purchase of
the fixed asset. The balance of the depreciation
expense account is used in the Income Statement
as an expense
22Adjustment Depreciation
Balance sheet extract
Fixed Assets e.g Cost Provision for Depreciation Net Book Value
Year 1 Motor Car 450,000.00 (72,000.00) 378,000
Year 2 Motor Car 450,000.00 (144,000.00) 306,000
Year 3 Motor Car 450,000.00 (216,000.00) 234,000
Year 4 Motor Car 450,000.00 (288,000.00) 162,000
23Adjustment Bad Debts
A bad debt occurs anytime a business is unable to
collect any amount from a debtor (someone to whom
goods were sold on credit). A debtor may not be
able to pay because of death, bankruptcy or if
(s)he has flees the country.
24Adjustment Bad Debts
When a debt becomes uncollectable it is written
off as follows
Date Details folio Dr. Cr
Bad debts x
Debtors (Name) x
To record bad debt written off
The written off customer balance is transferred
to the Bad debt A/c. This reduced the value of
debtors. The bad debt a/c balance is a loss or
an expense and is used the Income Statement.
Note the above double entry must be carried out
only if a note detailing bad debts appears after
the Trial Balance totals. If bad debts only
appear in the Trial Balance, it must only be used
in the Income Statement.
25Adjustment Provision for Bad Debts
- A provision for bad debts or doubtful debts
represents an estimation of the value of debtors
who may not pay or may default. This is another
example of a non cash expense - The aim of an initial provision for bad or
doubtful is to set aside an amount from profits
to cover the value of debtors who may default - The value of debtors who may be default is
normally expressed as a percent
26Adjustment Provision for Bad Debts
The example below shows the debtors balances of a
firm for three consecutive years. A provision
for bad debts is to be establish at 5.
2001 2002 2003
Debtors 25,000 35,000 24,000
Value of ending provision _at_ 5 of debtors after bad debts 1 250 1 750 1 200
27Adjustment Provision for Bad Debts
The value of the ending provision for bad debts
is entered in the Balance Sheet for each year as
a contra asset and subtracted from debtors
Balance Sheet extract
2001 2002 2003
Debtors 25,000 35,000 24,000
Provision for bad debts (1 250) (1 750) (1 200)
Net debtors 23 750 33 250 22 800
28Adjustment Provision for Bad Debts
Only the increase or decrease in the provision
for bad debt balance is entered in the Income
Statement An increase as an expense i.e. 1 250
and 500 for the accounting period 2002 and
2001 respectively A decrease as income i.e. 550
for 2003
2001 2002 2003
Increase (decrease) (1 250-0) 1 250 (1 750 1 250) 500 (1 200 1 750) (550)
The opening balance of a provision for bad debts
will be found in the Trial Balance, while the
closing balance will be given in a note after the
Trial Balance totals
29Adjustment Provision for Bad Debts
Provision for bad debt a/c
2001
31-Dec Bal c/d 1 250 31-Dec Income Statement 1 250
2002
31-Dec Bal c/d 1 750 1-Jan Bal b/d 1 250
31-Dec Income Statement 500
1 750 1 750
2003
31-Dec Income Statement 550 1-Jan Bal b/d 1 750
31-Dec Bal c/d 1 200
1 750 1 750
2004
1-Jan Bal b/d 1 200