1 adjustments to the final accounts principles and procedures

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Adjustments to the Adjustments to the final accountsfinal accounts

Principles and proceduresPrinciples and procedures

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Learning objectivesLearning objectives

1.1. Identify the main adjustments to the Identify the main adjustments to the final accounts;final accounts;

i.i. Prepaid and accrued expensesPrepaid and accrued expensesii.ii. Prepaid and accrued revenuesPrepaid and accrued revenuesiii.iii. Bad debts & provision for bad debts Bad debts & provision for bad debts

or doubtful debtsor doubtful debtsiv.iv. Depreciation and provision for Depreciation and provision for

depreciation of fixed assetsdepreciation of fixed assetsv.v. goodwillgoodwill

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Learning objectivesLearning objectives

2.2. Explain and apply to problem Explain and apply to problem situations.situations.

i.i. Show General Journal entriesShow General Journal entries

ii.ii. Show ledger accountsShow ledger accounts

iii.iii. Prepare Profit & Loss a/c (extract)Prepare Profit & Loss a/c (extract)

iv.iv. Prepare Balance Sheet (extract)Prepare Balance Sheet (extract)

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Prerequisite knowledgePrerequisite knowledge

1.1. Knowledge of Accounting concepts – Knowledge of Accounting concepts – accrual or matching conceptaccrual or matching concept

2.2. Review nominal accounts; i.e. Review nominal accounts; i.e. expense and revenue accountsexpense and revenue accounts

3.3. Ability to post to ledgersAbility to post to ledgers

4.4. Ability to prepare unadjusted final Ability to prepare unadjusted final accounts.accounts.

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Process Process

1.1. Explanation of conceptExplanation of concept

2.2. Demonstration of principleDemonstration of principle

3.3. Application to problem situation Application to problem situation

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Prepayments and Accruals: ReasonPrepayments and Accruals: Reason

Ensures that the matching or accruals Ensures that the matching or accruals concept is followed and that a true and concept is followed and that a true and fair valuation takes place.fair valuation takes place.

Thus, expenses for the period are Thus, expenses for the period are matched against revenues earned in matched against revenues earned in that period.that period.

Adjustments are necessary to show the Adjustments are necessary to show the actual expenses incurred and revenue actual expenses incurred and revenue earned whether or not they have been earned whether or not they have been paid for or collected.paid for or collected.

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Problem situation 1- Accrued Problem situation 1- Accrued expenseexpense

On June 5, 2002 John Doe paid electricity On June 5, 2002 John Doe paid electricity by cheque; $600. The electricity by cheque; $600. The electricity incurred for the period was actually incurred for the period was actually $800.$800.

REQUIREDREQUIRED::

Show the general journal and ledger Show the general journal and ledger entries and the P & L a/c and Balance entries and the P & L a/c and Balance sheet extracts.sheet extracts.

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General JournalGeneral Journal

Date Date Details Details FF Debit Debit Credit Credit

20022002

Dec. 31Dec. 31Electricity exp. a/cElectricity exp. a/c

Accrued Accrued ElectricityElectricity

To record the To record the amount of electricity amount of electricity incurred but not yet incurred but not yet paidpaid

200200

200200

2002 2002

Dec. 31Dec. 31Profit & Loss a/cProfit & Loss a/c

Electricity exp. Electricity exp. a/ca/c

To close the To close the electricity exp. a/c to electricity exp. a/c to the P & L a/cthe P & L a/c

800800

800800

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Accrued expensesAccrued expensesElectricity a/cElectricity a/c

20022002

Jun. 5Jun. 5 BankBank $$

600.600.20022002

Dec.31Dec.31 P & L a/cP & L a/c $$

800.800.

Dec.3Dec.311

Accrued Accrued bal.c/dbal.c/d

200.200.

800.800. 800.800.

20032003

Jan. 1Jan. 1 Bal. b/dBal. b/d 200.200.

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Profit & Loss a/c (extract)Profit & Loss a/c (extract)

$$

Gross ProfitGross Profit XXXX XXXX

Less: ExpensesLess: Expenses

Electricity ExpenseElectricity Expense 800.800.

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Balance sheet (extract)Balance sheet (extract)

$$

Liability and Owner’s EquityLiability and Owner’s Equity

Current Liabilities:Current Liabilities:

Accruals (Electricity exp.) Accruals (Electricity exp.) 200. 200.

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Problem 2 – Prepaid ExpenseProblem 2 – Prepaid Expense

Jane Doe paid rent by cheque, $1 000. Jane Doe paid rent by cheque, $1 000. on July 9, 2002. Of this amount $300 on July 9, 2002. Of this amount $300 represented part-payment for the represented part-payment for the following year.following year.

REQUIRED:REQUIRED:


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20022002

Dec. 31Dec. 31Prepaid Rent exp. Prepaid Rent exp. a/ca/c

Rent expense a/cRent expense a/c

To record rent paid To record rent paid in advancein advance

300300

300300

2002 2002

Dec. 31Dec. 31Profit & Loss a/cProfit & Loss a/c

Rent Expense a/cRent Expense a/c

To close the Rent To close the Rent exp. a/c to the P & L exp. a/c to the P & L a/ca/c

700700

700700

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Prepaid ExpensesPrepaid ExpensesRent expense a/cRent expense a/c

20022002

July. 9July. 9 BankBank $$

1 0001 00020022002

Dec. Dec. 3131

P & L a/cP & L a/c 700.700.

1 1 000000

Prepaid Bal. c/dPrepaid Bal. c/d 300300

1 0001 000

20032003

Jan. 1Jan. 1 Bal b/dBal b/d 300300

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$$


Less: ExpensesLess: Expenses

Rent ExpenseRent Expense 700. 700.

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$$

Assets Assets

Current Assets:Current Assets:

Prepayments (Rent exp.) Prepayments (Rent exp.) 300. 300.

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Prepaid and Accrued Prepaid and Accrued RevenuesRevenues

EXAMPLESEXAMPLES::►Rent received a/cRent received a/c►Commission received a/cCommission received a/c►Discount received a/cDiscount received a/c►Dividends received a/cDividends received a/c► Interest received a/cInterest received a/c

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Problem 3 – Accrued Problem 3 – Accrued RevenueRevenue

B. Mann is the owner of a Hot Dog Stand B. Mann is the owner of a Hot Dog Stand which he rents for $1 200 per year. At which he rents for $1 200 per year. At the end of the year he is owed $400 the end of the year he is owed $400 rent on the Hot Dog Stand.rent on the Hot Dog Stand.

REQUIREDREQUIRED::


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20022002

Dec. 31Dec. 31Accrued Rent rec. Accrued Rent rec. a/ca/c

Rent Receivable Rent Receivable a/ca/c

To record rent To record rent earned but not yet earned but not yet receivedreceived

400400

400400

2002 2002

Dec. 31Dec. 31Rent Receivable a/cRent Receivable a/c

Profit & Loss a/cProfit & Loss a/c

To close the rent To close the rent receivable a/c to the receivable a/c to the

P & L a/cP & L a/c

1 2001 200

1 2001 200

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Accrued RevenuesAccrued RevenuesRent receivable a/cRent receivable a/c

20022002

Dec. Dec. 3131

P & L a/cP & L a/c 1 2001 20020022002

Aug. 4Aug. 4 CashCash 800800

1 1 200200

Dec. Dec. 3131

Accrued Bal.c/dAccrued Bal.c/d 400400

1 2001 200

20032003

Jan 1Jan 1Bal. b/dBal. b/d 400400

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$$


Add: Other RevenueAdd: Other Revenue 1 200 1 200

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$$

Assets Assets

Current Assets:Current Assets:

Accrued Revenue ( Rent) Accrued Revenue ( Rent) 400. 400.

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Problem 4 – Prepaid Problem 4 – Prepaid RevenuesRevenues

The following information is extracted from The following information is extracted from the books of W. Smith on Dec. 2002:the books of W. Smith on Dec. 2002:

Commissions receivedCommissions received $1 800 $1 800Notes: One sixth of the cheque received for Notes: One sixth of the cheque received for

commission relates to the following year.commission relates to the following year.REQUIREDREQUIRED::


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Date Date Details Details FF Debit Debit Credit Credit 20022002

Dec. 31Dec. 31Commissions Rec. a/cCommissions Rec. a/c

Prepaid Commission Prepaid Commission

Rec. a/cRec. a/c

To record commission To record commission receivable paid in receivable paid in advanceadvance

300300

300300

2002 2002

Dec. 31Dec. 31Commission receivable Commission receivable a/ca/c

Profit & Loss a/cProfit & Loss a/c

To close off the To close off the commission receivable commission receivable a/c to the P & L a/ca/c to the P & L a/c

1 5001 500

1 5001 500

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Prepaid RevenuesPrepaid RevenuesCommissions receivable a/cCommissions receivable a/c

20022002

Dec. Dec. 3131

P & L a/cP & L a/c 1 5001 50020022002

Dec. Dec. 3131

BankBank 1 8001 800

Prepaid bal. Prepaid bal. c/dc/d

300300

1 1 800800

1 8001 800

20032003

Jan. 1Jan. 1Bal. b/dBal. b/d 300300

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$$


Add: Other RevenueAdd: Other Revenue 1 500 1 500

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$$

Liabilities and Owner’s EquityLiabilities and Owner’s Equity

Current LiabilitiesCurrent Liabilities

Prepaid Revenue (Commission) Prepaid Revenue (Commission) 300.300.

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Exercise:Exercise:

See worksheet:See worksheet:

Prepayments and accrualsPrepayments and accruals

1 adjustments to the final accounts principles and procedures

Documents

balance sheet extracts

accrued revenue rent

ledger entries

gross profit xxxxless

gross profit xxxxadd

accrued expensesprepaid

accrued expenseon

accrued revenuesexamples