Adjustments to the final accounts

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Adjustments to the final accounts

• Principles and procedures

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Learning objectives

• Identify the main adjustments to the final
  accounts
• Prepaid and accrued expenses
• Prepaid and accrued revenues
• Bad debts provision for bad debts or doubtful
  debts
• Depreciation and provision for depreciation of
  fixed assets
• goodwill

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Learning objectives

• Explain and apply to problem situations.
• Show General Journal entries
• Show ledger accounts
• Prepare Profit Loss a/c (extract)
• Prepare Balance Sheet (extract)

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Prerequisite knowledge

1. Knowledge of Accounting concepts accrual or
   matching concept
2. Review nominal accounts i.e. expense and revenue
   accounts
3. Ability to post to ledgers
4. Ability to prepare unadjusted final accounts.

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Process

1. Explanation of concept
2. Demonstration of principle
3. Application to problem situation

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Prepayments and Accruals Reason

• Ensures that the matching or accruals concept is
  followed and that a true and fair valuation takes
  place.
• Thus, expenses for the period are matched against
  revenues earned in that period.
• Adjustments are necessary to show the actual
  expenses incurred and revenue earned whether or
  not they have been paid for or collected.

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Problem situation 1- Accrued expense

• On June 5, 2002 John Doe paid electricity by
  cheque 600. The electricity incurred for the
  period was actually 800.
• REQUIRED
• Show the general journal and ledger entries and
  the P L a/c and Balance sheet extracts.

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General Journal
Date Details F Debit Credit
2002 Dec. 31 Electricity exp. a/c Accrued Electricity To record the amount of electricity incurred but not yet paid 200 200
2002 Dec. 31 Profit Loss a/c Electricity exp. a/c To close the electricity exp. a/c to the P L a/c 800 800
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Accrued expensesElectricity a/c
2002 Jun. 5 Bank 600. 2002 Dec.31 P L a/c 800.
Dec.31 Accrued bal.c/d 200. 800. 800.
2003 Jan. 1 Bal. b/d 200.
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Profit Loss a/c (extract)

• Gross Profit XXXX
• Less Expenses
• Electricity Expense 800.

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Balance sheet (extract)

• Liability and Owners Equity
• Current Liabilities
• Accruals (Electricity exp.) 200.

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Problem 2 Prepaid Expense

• Jane Doe paid rent by cheque, 1 000. on July 9,
  2002. Of this amount 300 represented
  part-payment for the following year.
• REQUIRED
• Show the general journal and ledger entries and
  the P L a/c and Balance sheet extracts.

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General Journal
Date Details F Debit Credit
2002 Dec. 31 Prepaid Rent exp. a/c Rent expense a/c To record rent paid in advance 300 300
2002 Dec. 31 Profit Loss a/c Rent Expense a/c To close the Rent exp. a/c to the P L a/c 700 700
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Prepaid ExpensesRent expense a/c
2002 July. 9 Bank 1 000 2002 Dec. 31 P L a/c 700.
1 000 Prepaid Bal. c/d 300 1 000
2003 Jan. 1 Bal b/d 300
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Profit Loss a/c (extract)

• Gross Profit XXXX
• Less Expenses
• Rent Expense 700.

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Balance sheet (extract)

• Assets
• Current Assets
• Prepayments (Rent exp.) 300.

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Prepaid and Accrued Revenues

• EXAMPLES
• Rent received a/c
• Commission received a/c
• Discount received a/c
• Dividends received a/c
• Interest received a/c

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Problem 3 Accrued Revenue

• B. Mann is the owner of a Hot Dog Stand which he
  rents for 1 200 per year. At the end of the
  year he is owed 400 rent on the Hot Dog Stand.
• REQUIRED
• Show the general journal and ledger entries and
  the P L a/c and Balance sheet extracts.

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General Journal
Date Details F Debit Credit
2002 Dec. 31 Accrued Rent rec. a/c Rent Receivable a/c To record rent earned but not yet received 400 400
2002 Dec. 31 Rent Receivable a/c Profit Loss a/c To close the rent receivable a/c to the P L a/c 1 200 1 200
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Accrued RevenuesRent receivable a/c
2002 Dec. 31 P L a/c 1 200 2002 Aug. 4 Cash 800
1 200 Dec. 31 Accrued Bal.c/d 400 1 200
2003 Jan 1 Bal. b/d 400
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Profit Loss a/c (extract)

• Gross Profit XXXX
• Add Other Revenue 1 200

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Balance sheet (extract)

• Assets
• Current Assets
• Accrued Revenue ( Rent) 400.

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Problem 4 Prepaid Revenues

• The following information is extracted from the
  books of W. Smith on Dec. 2002
• Commissions received 1 800
• Notes One sixth of the cheque received for
  commission relates to the following year.
• REQUIRED
• Show the general journal and ledger entries and
  the P L a/c and Balance sheet extracts.

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General Journal
Date Details F Debit Credit
2002 Dec. 31 Commissions Rec. a/c Prepaid Commission Rec. a/c To record commission receivable paid in advance 300 300
2002 Dec. 31 Commission receivable a/c Profit Loss a/c To close off the commission receivable a/c to the P L a/c 1 500 1 500
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Prepaid RevenuesCommissions receivable a/c
2002 Dec. 31 P L a/c 1 500 2002 Dec. 31 Bank 1 800
Prepaid bal. c/d 300 1 800 1 800
2003 Jan. 1 Bal. b/d 300
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Profit Loss a/c (extract)

• Gross Profit XXXX
• Add Other Revenue 1 500

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Balance sheet (extract)

• Liabilities and Owners Equity
• Current Liabilities
• Prepaid Revenue (Commission) 300.

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Exercise

• See worksheet
• Prepayments and accruals