Adjustments for Final Accounts
Prepayments and Accruals
Expenses and revenues are not always
paid or received on time.
Cash paid and received in a year should
not be entered directly into the profit
and loss account of that year.
Adjustment should be made.
Prepaid expenses

those to be used in the following period but have
been paid for in advance.
Accrued expenses

those which have been used up in the current year,
but have not yet been paid for.
Prepaid income

those to be earned in the following period but have
been received in advance.
Accrued income

those which have been earned in the current
period but have not yet been received.
Example
2 firms who pay rent for buildings in
Hong Kong. The rent for each building
is $1,200 a year.
1.
2.
Firm A paid $1,00 in the year. Own $200
for rent.
Firm B paid $1,300 in the year. $100 in
advance for the following year.
1.
2.
P & L accounts for 12 months needs
12 months rent as an expense =
$1,200.
Firm A, $200 accrued expenses be
adjusted.
Firm B, $100 prepaid expenses be
adjusted
Accrued Expenses
Accrued expenses
Assume that rent of $1,000 per year is
payable at the end of every 3 months.
The rent was not always paid on time
Amount
$250
$250
$250
$250
Rent due
31 March 2005
30 June 2005
30 Sept. 2005
31 Dec. 2005
Rent paid
31 March 2005
2 July 2005
4 Oct. 2005
5 January
2006
Rent
2005
Mar 31 Bank
Jul 2
Bank
Oct 4 Bank
Dec 31 Accrued c/d
$
250
250
250
250
2005
Dec 31 Profit and loss
$
1,000
1,000
1,000
2006
Jan 1 Accrued b/d
250
Prepaid Expenses
Prepaid expenses
Insurance for a firm is at the rate $840 a
year, starting from 11 January 2005.
The firm has agreed to pay this at the
rate of $210 every 3 months.
Amount
$210
Insurance due
31 March 2005
$210
30 June 2005
$210
30 Sept. 2005
$210
31 Dec. 2005
Insurance paid
$210 28 Feb 2005
$420 31 Aug. 2005
$420 18 Nov. 2005
Insurance
2005
$
2005
Feb 28 Bank
210
Dec 31 Profit and loss
840
Aug 31 Bank
Nov 18 Bank
420
420
Dec 31 Prepaid c/d
210
1,050
2006
Jan 1
Prepaid b/d
210
$
1,050
Prepayment will also happen when
items other than purchases are bought
for use in the business, and they are not
fully used up in the period.
For instance, stationery is normally not
entirely used up over the period in
which it is bought.
Example
Year ended 31 December 2005
Stationery bought in the year $2,200
Stock of stationery in hand as at 31
December 2005 $400
Stationery
2005
$
Dec 31 Bank
2,200
2,200
2005
Dec 31 Profit and loss
Dec 31 Stock c/d
$
1,800
400
2,200
2006
Jan 1
Stock b/d
400
The stock of stationery is not added to the stock of unsold goods in
hand in the balance sheet, but is added to the other prepayments of
expense.
Accrued Income
Accrued income
Assumed our warehouse is larger than
we need. We rent part of it to another
firm for $800 per annum.
Amount
$200
Rent due
Rent received
31 March 2005 4 April 2005
$200
30 June 2005
6 July 2005
$200
30 Sept. 2005
9 Oct. 2005
$200
31 Dec. 2005
7 Jan. 2006
Rent receivable
2005
$
Dec 31 Profit and Loss
800
800
2006
Jan 1
Accrued b/d
210
2005
Apr 5 Bank
Jul 6 Bank
Oct 9 Bank
Dec 31 Accrued c/d
$
200
200
200
200
800
Expenses and revenue accounts
covering more than one period
Example:
On 31 Dec. 2004 3 months rent of $3,000
was owing.
The rent chargeable per year was $12,000.
The following payments were made in the
year 2005: 6 Jan. $3,000; 4 April $3,000; 7
July $3,000; 18 Oct $3,000
The final 3 months rent for 2005 is still
owing.
Rent
2005
Jan 6
Apr 4
Jul 7
Oct 18
Dec 31
$
Bank
Bank
Bank
Bank
Owing c/d
3,000
3,000
3,000
3,000
3,000
2005
Jan 1 Owing b/d
Dec 31 Profit and loss
15,000
$
3,000
12,000
15,000
2006
Jan 1 Owning b/d
3000
Example
Rent and rates are joined together.
Rent is payable of 6000 per annum
Rates of $4,000 per annum are payable by
instalments.
At 1 Jan 20x5 rent $1,000 had been prepaid
in 20x4.
On 1 Jan 20x5 rates were owned of $400.
During 20x5 rent was paid $4,500.
During 20x5 rates were paid $5,000.
On 31 Dec 20x5 rent $500 was owing.
On 31 Dec 20x5 rates of $600 had been
prepaid.
Rent and Rates
2005
Jan 1
Dec 31
Dec 31
Dec 31
Rent prepaid b/d
Bank: rent
Bank: rates
Owing c/d
$
2005
1,000
4,500
5,000
500
Jan 1
$
Rates owing b/d
Dec 31 Profit and loss
Dec 31 Rates prepaid c/d
11,000
2006
Jan 1 Prepaid b/d
2006
600 Jan 1 Owing b/d
400
10,000
600
11,000
500
Expenses for the period
= Cash paid – Accruals in last year +
Accruals in this year + Prepayments in
last year – Prepayment in this year
Income for the period
= Receipt – Accruals in last year +
Accruals in this year + Prepayments in
last year – Prepayments in this year
Trading and Profit and Loss Account
Gross profit / loss
= Net sales – Cost of goods sold
Net sale
= Sales – Returns Inwards
Cost of goods sold
= Opening stock + [Purchase + Carriage
inwards – Returns outwards + other purchase
costs] – Closing stock
Net Profit
= Gross profit + Other income – Total
expenses
Name of the Company
Trading and Profit and Loss Account for the year ended 31 Dec 19xx
$
$
Sales
Less Returns Inwards
Less cost of Goods Sold
Opening Stock
Purchases
Add Carriage Inwards
Less Returns Outwards
Less Closing Stock
Gross Profit
x
x
x
x
x
x
(x)
(x)
Add Discount received
Rent Received
Profit on Disposal on M.V.
Decrease in provision for bad debt
Less Expenses
Rent and Rates
Insurance
Carriage Outwards
Discount Allowed
Bad debts
Increase in provision for bad debts
Depreciation
Loss on Disposal of Furniture
Net Profit
$
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Name of the Company
Trading and Profit and Loss Account for the year ended 31 Dec 19xx
$
Fixed Assets
Machinery
Motors
Investment ($x at market value)
Current Assets
Stock
Debtors
Less provision for bad debt
Prepaid expenses
Accrued income
Bank
Cash
Less: Current Liabilities
Creditors
Accrued expenses
Prepaid income
Bank overdrafts
Working Capital
Cost
x
x
x
x
(x)
$
Dep.
x
x
x
$
Net
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
$
Financed by:
Capital
Bal as at 1 Jan 19xx
Add: Net profit / Less Net loss
Less: Drawings
Long-term Liabilities
Debentures
Bank Loans
$
$
x
x
x
x
x
x
x
x
Working capital
Working capital is the amount by which
current assets exceed current liabilities.
Drawings
They refer to the using up of business
resources by the owner(s) of the
business.
Accounting entries
Dr Drawings
Cr Cash / Bank
Dr Drawings
Cr Purchases
Dr Drawings
Cr Expenses
drawn from the cash till
or business bank
account
goods taken by the
proprietor
private expenses
Losses of goods
Losses of raw materials and
trading stock can be classified
1. normal losses
2. abnormal losses
Normal Loss
Normal Losses caused by
wastage, obsolescence and other
reasons which are expected
within the ordinary activities of the
business.
No entry is needed for normal
losses.
Abnormal Loss
.
Losses caused by reasons which are
unexpected within the ordinary
activities of the business such as fire
or accidents.
These should be recorded in the
books as below.
(i) Losses without insurance claim
Dr Fire / Burglary Loss
With the total loss
Cr Trading
Dr Profit and loss
With the total loss
Cr Fire / Burglary Loss
(ii) Losses with insurance claim
Dr Fire/Burglary Loss
Cr Trading
Dr Bank/Insurance company
Cr Fire/Burglary Loss
Dr Profit and Loss
Cr Fire / Burglary Loss
With the total loss
Insurance claim received
Transferring the net loss to
profit and loss account at the
year end
Example (Normal loss)
$
Purchases (100 units)
100
Sales (70 units)
210
Closing stock (20 units)
20
Expenses
50
10 units of goods were obsolete.
Abnormal loss without insurance claim
Trading and Profit and Loss Account
$
Purchase ($1 * 100)
Less Closing Stock($1*20)
Less Fire loss
Cost of goods sold
Gross profit
Expenses
Fire Loss
Net Profit
100
20
80
10
70
140
210
50
10
80
140
$
Sales ($3 * 70)
Gross Profit
210
____
210
140
___
140
Abnormal loss with insurance claim ($6)
Trading and Profit and Loss Account
$
Purchase ($1 * 100)
Less Closing Stock
Less Fire loss
Cost of goods sold
Gross profit
Expenses
Fire Loss ($10 - $6)
Net Profit
100
20
80
10
70
140
210
50
4
86
140
$
Sales ($3 * 70)
Gross Profit
210
____
210
140
___
140