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Preparing Final Accounts, including Period End Adjustments Chapter 11 © Luby & O’Donoghue (2005)

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Presentation on theme: "Preparing Final Accounts, including Period End Adjustments Chapter 11 © Luby & O’Donoghue (2005)"— Presentation transcript:

1 Preparing Final Accounts, including Period End Adjustments Chapter 11 © Luby & O’Donoghue (2005)

2 Illustration

3 Notes Depreciation Provisions for bad debts and discounts Prepaid expenses Accrued expenses

4 Comprehensive example Debit €Credit € Purchases154,000 Sales350,000 Creditors30,000 Debtors25,000 Bad debt1,200 Marketing and sales10,420 Office expenses5,600 Insurance6,700 Discounts9001,000 Carriage inwards5,000 Stock as at 1/7/035,000 Wages and salaries90,000 Motor expenses5,600 Rates4,600 Light and heat4,678 Provision bad debts (1/7/03)300 Premises154,000 Furniture & equipment60,500 Depreciation furniture(1/7/03)4,000 Motor vehicles40,000 Depreciation vehicles (1/7/03)3,200 Bank4,200 Loan (to be repaid 2009)120,000 Drawings22,500 Capital _______ 91, ,898 The following additional information is available: 1. 1.Stock was counted and valued at 30 June 2004 at €6, Insurance includes €1,000 of cover that relates to the year to 30 June Bad debts of €1,000 included in debtors in the trial balance is to be written off Wages owing at the 30 June 2004 amounted to €5, Provision for bad debts is to be maintained at a level of 3 percent of debtors after all bad debts are written off It is the policy of the business to depreciate furniture and equipment at 10 per cent per annum straight line method and motor vehicles at 20 per cent per annum straight line method. There is no depreciation on premises Interest on the loan is charged at €6,000 for the year. This has not been paid by 30 June Required: a) a)Prepare a trading and profit and loss account for the year to 30 June 2004 b) b)Prepare a balance sheet at that date

5 Trading Profit and Loss Account for year ended 30 June 2004 €€€ Sales350,000 Less Cost of Goods Sold Opening Stock5,000 Purchases154,000 Carriage Inwards5,000159,000 Closing Stock(6,000)(158,000) Gross Profit192,000 Add Other Income/Gains Discount received1,000 Less Expenses Bad debtsNote 11,200 + additional bad debts1,0002,200 Marketing and Sales10,420 Office expenses5,600 InsuranceNote 26,700 - Prepayment(1,000)5,700 Discount allowed900 Wages/Salaries Note 3 90,000 + Accrual5,00095,000 Motor expenses5,600 Rates4,600 Light and heat4,678 Increase in provision for bad debts Note Depreciation - furniture & equipment Note 5 6,050 Depreciation - vehicles8,000 Loan Interest Note 6 6,000(155,168) Net Profit 37,832

6 Balance Sheet as at 30 June 2004 Fixed AssetsCostDepreciationN.B.V. Premises154,000 Furniture and equipment Note 5 60,50010,05050,450 Motor vehicles40,00011,20028, ,50021,250233,250 Current Assets Stock6,000 Debtors (25, ,000) Note 1 24,000 Less provision for bad debts Note ,280 Prepayments Note 2 1,000 Bank4,200 34,480 Current liabilities Creditors30,000 Accruals (5, ,000)Note 3/611,000(41,000) Working capital - net current assets(6,520) Long-term liabilities Loan(120,000) 106,730 Financed By Opening capital91,398 Net profit37,832 Drawings22, ,730

7 Profit as an estimate The calculation of profit requires management make estimates. This is a subjective process affecting profit. Ignore the need to provide for bad debts to ensure profit and assets (debtors) are recorded at higher levels Estimate long lives on assets ensures a lower depreciation charge in the profit and loss account. The result is higher profits and higher asset levels. The adjustment for accruals need to be estimated. Classification decisions between capital and revenue expenditure can result in profit being created. It is important to appreciate that profit is, in many respects, an opinion and one should judge a profit figure based on the assumptions that underlie the calculation of that profit.


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