By S.K Chik

1
Year End Adjustments

• By S.K Chik

2
Accruals and Deferrals

• 1) Accrued Expenses (Expenses Owing)
• Expenses due and unpaid at the end of the period
• Transfer it to the P L and shown as a
  liability in the balance sheet
• E.g. Advertising accrued 100 as at 31 December
  20X6, in addition to 500 paid for the year.

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• 2) Accrued Revenues (Income Receivable)
• Revenues not yet received at the end of the
  period
• Transfer it to the P L and shown as an asset
  in the balance sheet
• E.g. Rent 1,100received for 11 months up to 30
  November 20X6.

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• 3) Prepayments (Expenses Paid in Advance)
• Expenses paid for the following period
• Transfer it to the P L and shown as an asset
  in the balance sheet
• E.g. Insurance 1,000 paid in the year, of which
  250 is unexpired as at 31 December 20X6

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• 4) Deferred Revenues (Income Received in Advance)
• Revenues received relating to the following
  period
• Transfer it to the P L and shown as a
  liability in the balance sheet

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Depreciation and Disposal of Assets

• Depreciation
• Is the part of the cost of the fixed asset
  consumed during its period of use by the firm
• Debit into P L as a expense
• Cause
• Physical deterioration
• Obsolescence (out-dated)
• Inadequacy
• Depletion
• Amortization

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Methods of Calculating Depreciation

• Straight Line Method
• A fixed amount of depreciation is charged each
  year

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• Reducing Balance Method
• A percentage of the written down value of the
  fixed asset is charged each year

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• Example
• Mr. Foo purchased a new machine of 5,000 for his
  factory on 1 June 19X1. The year ended of his
  business is 31 May. Mr. Foo wrote off
  depreciation directly to the machinery account
  under the reducing balance method at 10 per
  annum.
• Prepare the following accounts
• machinery, and
• Provision for depreciation on machinery.
• Show the extract of the balance sheet as at 31
  May 19X2, 19X3 and 19X4.

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Provision for Depreciation- Machinery
19X2
May 31 Profit and loss 500 Jun
1 Bal b /d
500 19X3 May 31 Profit and loss
450
950 Jun 1 Bal b /d
950 19X4 May 31 Profit and loss
405
1,355 Jun 1 Bal b /d
1,355
19X2
May 31 Bal c /d
500 19X3 May 31 Bal c /d
950
950 19X4 May 31 Bal c /d
1,355
1,355
5,000 X 0.1
(5,000 500)X 0.1
(5,000 950)X 0.1
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Disposal of Assets
The machine was sold on 2 June 19X4 for 4,000.
Draw up the accounts for the year ended 31 May
19X5.
Solution
Machinery
19X1
Jun 1 Bank
5,000
19X1
Jun 2 Disposal of machinery 5,000
Provision for Depreciation- Machinery
19X1
Jun 2 Disposal of machinery 1,355
19X1
Jun 1 Bal b/ d
1,355
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Provision for Bad Debts

• Bad Debts
• When the debt becomes irrecoverable it is written
  off as bad
• Dr. Bad debts Cr. Debtors
• At the end of the financial year, the total of
  the bad debts will be closed to the profit and
  loss account
• Dr. P L Cr. Bad debts

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Provision for Bad and Doubtful Debts

• The bad debt is known cost to the business.
• But an adjustment should be made as a provision
  on the closing value of debtors to anticipate
  possible losses, typically on a percentage basis.

Dr. profit and loss account (with amount of
provision increased) Cr. Provision for bad debts
account
Dr. Provision for bad debts account Cr. profit
and loss account (with amount of provision
decreased)
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Example
Debtors account showed the year- end balances and
provision for bad debts was made on these debtors
as follow Year
on debtors 1
80,000 10 2
100,000
10 3 88,000
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Profit and Loss Account for the year ended 31
December
Year 1
Increase in Provision for bad debt
8,000
Year 2
Increase in Provision for bad debt
2,000
Year 3
Decrease in Provision for bad debt
2,960
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Bad Debts Recovered

• When a debt previously written off as bad is
  subsequently paid,
• the debt may first be reinstated in the personal
  account,
• and then the receipt of cash is recorded through
  the personal account.
• A bad debts recovered account should be opened as
  a revenue in the period.

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Double entries of bad debt recovered
Dr. personal account (debtor) Cr. Bad debt
recovered account Dr. bank Cr. Personal account