Adjustments to the final
accounts
Principles and procedures
1
Learning objectives
1.
i.
ii.
iii.
iv.
v.
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
2
Learning objectives
2.
Explain and apply to problem situations.
i.
Show General Journal entries
Show ledger accounts
Prepare Profit & Loss a/c (extract)
Prepare Balance Sheet (extract)
ii.
iii.
iv.
3
Prerequisite knowledge
1.
2.
3.
4.
Knowledge of Accounting concepts –
accrual or matching concept
Review nominal accounts; i.e. expense and
revenue accounts
Ability to post to ledgers
Ability to prepare unadjusted final
accounts.
4
Process
1.
2.
3.
Explanation of concept
Demonstration of principle
Application to problem situation
5
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.
6
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.
7
General Journal
Date
Details
2002
Dec. 31
Electricity exp. a/c
Accrued Electricity
To record the amount of
electricity incurred but
not yet paid
Profit & Loss a/c
Electricity exp. a/c
To close the electricity
exp. a/c to the P & L a/c
2002
Dec. 31
F
Debit
Credit
200
200
800
800
8
Accrued expenses
Electricity a/c
2002
Jun. 5
Bank
Dec.31 Accrued bal.c/d
$
600.
2002
Dec.31
P & L a/c
200.
800.
$
800.
800.
2003
Jan. 1
Bal. b/d
200.
9
Profit & Loss a/c (extract)
Gross Profit
Less: Expenses
Electricity Expense
$
XXXX
800.
10
Balance sheet (extract)
$
Liability and Owner’s Equity
Current Liabilities:
Accruals (Electricity exp.)
200.
11
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.
12
General Journal
Date
Details
F
Debit
2002
Dec. 31
Prepaid Rent exp. a/c
Rent expense a/c
To record rent paid in
advance
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
Credit
300
700
13
Prepaid Expenses
Rent expense a/c
2002
July. 9
Bank
$
1 000
2002
Dec. 31 P & L a/c
Prepaid Bal. c/d
1 000
2003
Jan. 1
Bal b/d
700.
300
1 000
300
14
Profit & Loss a/c (extract)
Gross Profit
Less: Expenses
Rent Expense
$
XXXX
700.
15
Balance sheet (extract)
$
Assets
Current Assets:
Prepayments (Rent exp.)
300.
16
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
17
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.
18
General Journal
Date
Details
F
Debit
2002
Dec. 31
Accrued Rent rec. a/c
Rent Receivable a/c
To record rent earned
but not yet received
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
Credit
400
1 200
19
Accrued Revenues
Rent receivable a/c
2002
Dec.
31
P & L a/c
1 200
2002
Aug. 4
Cash
Dec. 31 Accrued Bal.c/d
1 200
2003
Jan 1
Bal. b/d
800
400
1 200
400
20
Profit & Loss a/c (extract)
$
XXXX
Gross Profit
Add: Other Revenue
1 200
21
Balance sheet (extract)
$
Assets
Current Assets:
Accrued Revenue ( Rent)
400.
22
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.
23
General Journal
Date
Details
2002
Dec. 31
Commissions Rec. a/c
Prepaid Commission
Rec. a/c
To record commission
receivable paid in advance
300
Commission receivable a/c
Profit & Loss a/c
To close off the
commission receivable a/c
to the P & L a/c
1 500
2002
Dec. 31
F
Debit
Credit
300
1 500
24
Prepaid Revenues
Commissions receivable a/c
2002
Dec.
31
P & L a/c
1 500
Prepaid bal. c/d
300
1 800
2002
Dec. 31 Bank
1 800
1 800
2003
Jan. 1
Bal. b/d
300
25
Profit & Loss a/c (extract)
$
XXXX
Gross Profit
Add: Other Revenue
1 500
26
Balance sheet (extract)
$
Liabilities and Owner’s Equity
Current Liabilities
Prepaid Revenue (Commission)
300.
27
Exercise:
See worksheet:
Prepayments and accruals
28