1 Bad Debts, Depreciation, Pre-payments & Accruals AS Accountancy
2 Starter ActivityUsing the HEXAGONS to each represent one key term / ideaLink as many hexagons together to demonstrate the main areas of consideration when drawing up the two main financial statementsIncome StatementStatement of Financial PositionYou have 30 mins before you must present your links to the other groups.
3 Learning Objectives for Bad Debts Grade E – to be able to balance off Debtor accounts to allow for Bad DebtsGrade C – to be able to incorporate the Bad Debt allowance & Allowance for Doubtful Debt into the Income StatementGrade A – to be able to evaluate the different reasons that bad debts may occur in a business and why you should make provision for them
4 What are Bad Debts?Bad Debts are when a customer may never pay for the goods that they bought on creditNORMAL business riskBad Debt is a historical entry – the account has already proved to be bad.
5 Reasons for Bad Debts What do you think? Debtor may refuse to pay for one of their invoices (not all)Debtor may refuse to pay for part of an invoiceDebtor may indicate that business is failing and can only pay some of the debtDebtor’s business has failed and is unable to pay any of the debt
6 How to record the bad debt Balance off the Debtors account to allow for the bad debt (Credit the account)Complete the double-entry with a Debit to the “Bad Debts” accountPost the total Bad Debt to the ‘profit & loss’ section of the Income Statement as an Expense.
8 Income StatementGross Profit 10,000 Less: Bad Debts (200) Profit 9,800
9 Allowance for Doubtful Debt Prudence ConceptAccounts receivable & profit OVERSTATED if provision not madeImpossible to be accurateEstimated FiguresHow much will be ‘bad’?% of total amount due?The longer owing the higher the chancePrediction of FUTURE
10 Accounting Entries for Doubtful Debts Debit the Income statementDeduct from GROSS profit as an ExpenseCredit the Allowance for Doubtful Debts Account (double-entry)Deduct from Current Assets in the Statement of Financial Position
11 Increasing/Decreasing the provision Once calculated it remains in accounting systemMay need to increase/decrease in line with the increase/decrease in DebtorsRecord the CHANGE in provision
12 Double Entry Profit & Loss 2011 £ Dec 31 Allowance for Doubtful Debts 200
13 Income Statement Gross Profit 21,000 Less: - Rent & Rates 3,800 Salaries 10,000Bad Debts written off 100Provision for Bad Debts 9513,995Profit ,005
14 Statement of Financial Position Current Assets Stock 6,000 Debtors 1,900 Less: Provision for Doubtful Debt (95) 1,805 7,805
15 QuestionWhy aren’t BAD DEBTS shown in the Statement of Financial Position?
16 Learning Objectives for Depreciation Grade E – can calculate basis straight line depreciationGrade C – Can incorporate the depreciation into the Income Statement AND Statement of Financial PositionGrade A – Can discuss the causes of depreciation and the need to make provision for it in business.
17 What assets can depreciate? Non-current assets (fixed assets) that are long term but don’t last foreverMachineryMotor vehiclesFixturesBuildings (in rare circumstances)
18 Amounts of Depreciation Difference between initial cost and the disposal costBought for £10,000Sold 3 yrs later for £4,000Depreciation is £6,000
20 Methods of Calculation Straight Line MethodReducing Balance MethodFor the exam you only need to be able to use the Straight-Line Method
21 Straight Line Method Estimated numbers of years of use Initial Cost of AssetInitial Cost / number of years = yearly depreciation£22,000 / 4 years = £5,500 per year
22 Recording depreciation Income statementAdd expense “provision for depreciation”Statement of Financial PositionLess the Accumulated Depreciation from the Non-current Asset
23 Straight Line MethodAnother way to calculate when you know of a disposal value(Initial Cost – disposal Value) / Number of years(£22000 – £2000)/4 = £5000 annual depreciation
24 Reducing Balance Method % is written off per yearEgOriginal Cost £12,000Yr 1 25% of 12,000 £3,000Value at end of year £9,000Yr 2 25% of 9,000 £2,250Value at end of year £6,750Yr 3 25% of 6,750 £1,687Value at end of year £5,063etc
25 Recording the Depreciation Income StatementLess Expense of Depreciation for yearStatement of Financial PositionShow total (accumulated) depreciation to date deducted from Non-Current Assets
26 Working example Van £22,000 initial cost £5,500 each year depreciation over 4 years (straight line)
27 Year 1Income statement extract Gross profit x Less: Depreciation £5,500 Extract from Statement of Financial position Non-Current Assets Van £22,000 Less Accumulated Depreciation (£5,500) £16,500
28 Year 2Income statement extract Gross profit x Less: Depreciation £5,500 Extract from Statement of Financial position Non-Current Assets Van £22,000 Less Accumulated Depreciation (£11,000) £11,000
29 Year 3Income statement extract Gross profit x Less: Depreciation £5,500 Extract from Statement of Financial position Non-Current Assets Van £22,000 Less Accumulated Depreciation (£16,500) £5,500
30 Year 4Income statement extract Gross profit x Less: Depreciation £5,500 Extract from Statement of Financial position Non-Current Assets Van £22,000 Less Accumulated Depreciation (£22,000)
31 Prepayments & Accruals Previously assumed all expenses were incurred in the period of the Income statement. Assumed no expenses were outstanding at the beginning of the year and no expenses had been paid early for the next year (in advance)
32 AccrualsPayments that you know you have accrued in the accounting period but you haven’t been asked to pay for yet.Example: -Buying goods on the 30 Dec 2011Being sent your credit card statement with a request for the payment on 15 Jan 2012
33 Pre-paymentsPayments made in one accounting period although the expense isn’t incurred until the next accounting periodExampleRental for the telephone is charged in November for the next 3 months (Nov, Dec & Jan)
34 Recording Accruals & Pre-payments in the Income Statement Add the amount OWING to the original expense in the trial balance and enter into the INCOME STATEMENTPre-paymentsTake the pre-paid amount away from the original expense in the trial balance and enter the new total into the INCOME STATEMENT
35 Recording in the Statement of Financial Position AccrualsCurrent LiabilitiesAccruals xPrepaymentsCurrent AssetsInventory xDebtors xPre-payments x