1. 1 Adjustments to the final accounts Principles and procedures

2. 2 Learning objectives 1. Identify the main adjustments to the final accounts; i. Prepaid and accrued expenses ii. Prepaid and accrued revenues iii. Bad debts & provision for bad debts or doubtful debts iv. Depreciation and provision for depreciation of fixed assets v. goodwill

3. 3 Learning objectives 2. Explain and apply to problem situations. i. Show General Journal entries ii. Show ledger accounts iii. Prepare Profit & Loss a/c (extract) iv. Prepare Balance Sheet (extract)

4. 4 Prerequisite knowledge 1. Knowledge of Accounting concepts – accrual or matching concept 2. Review nominal accounts; i.e. expense and revenue accounts 3. Ability to post to ledgers 4. Ability to prepare unadjusted final accounts.

5. 5 Process 1. Explanation of concept 2. Demonstration of principle 3. Application to problem situation

6. 6 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.

7. 7 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.

8. 8 General Journal DateDetailsFDebitCredit 2002 Dec. 31 Electricity exp. a/c Accrued Electricity Accrued Electricity To record the amount of electricity incurred but not yet paid 200200 2002 Dec. 31 Profit & Loss a/c Electricity exp. a/c Electricity exp. a/c To close the electricity exp. a/c to the P & L a/c 800800

9. 9 Accrued expenses Electricity a/c 2002 Jun. 5 Bank $600.2002Dec.31 P & L a/c $800. Dec.31 Accrued bal.c/d 200.800.800. 2003 Jan. 1 Bal. b/d 200.

10. 10 Profit & Loss a/c (extract) $ Gross Profit XXXX Less: Expenses Electricity Expense 800.

11. 11 Balance sheet (extract) $ Liability and Owner’s Equity Current Liabilities: Accruals (Electricity exp.) 200.

12. 12 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.

13. 13 General Journal DateDetailsFDebitCredit 2002 Dec. 31 Prepaid Rent exp. a/c Rent expense a/c Rent expense a/c To record rent paid in advance 300300 2002 Dec. 31 Profit & Loss a/c Rent Expense a/c Rent Expense a/c To close the Rent exp. a/c to the P & L a/c 700700

14. 14 Prepaid Expenses Rent expense a/c 2002 July. 9 Bank $ 1 000 2002 Dec. 31 P & L a/c 700. 1 000 Prepaid Bal. c/d 300 1 000 2003 Jan. 1 Bal b/d 300

15. 15 Profit & Loss a/c (extract) $ Gross Profit XXXX Less: Expenses Rent Expense 700.

16. 16 Balance sheet (extract) $Assets Current Assets: Prepayments (Rent exp.) 300.

17. 17 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

18. 18 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.

19. 19 General Journal DateDetailsFDebitCredit 2002 Dec. 31 Accrued Rent rec. a/c Rent Receivable a/c Rent Receivable a/c To record rent earned but not yet received 400400 2002 Dec. 31 Rent Receivable a/c Profit & Loss a/c Profit & Loss a/c To close the rent receivable a/c to the P & L a/c 1 200

20. 20 Accrued Revenues Rent receivable a/c 2002 Dec. 31 P & L a/c 1 200 2002 Aug. 4 Cash800 1 200 Dec. 31 Accrued Bal.c/d 400 1 200 2003 Jan 1 Bal. b/d 400

21. 21 Profit & Loss a/c (extract) $ Gross Profit XXXX Add: Other Revenue 1 200

22. 22 Balance sheet (extract) $Assets Current Assets: Accrued Revenue ( Rent) 400.

23. 23 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.

24. 24 General Journal DateDetailsFDebitCredit 2002 Dec. 31 Commissions Rec. a/c Prepaid Commission Prepaid Commission Rec. a/c Rec. a/c To record commission receivable paid in advance 300300 2002 Dec. 31 Commission receivable a/c Profit & Loss a/c Profit & Loss a/c To close off the commission receivable a/c to the P & L a/c 1 500

25. 25 Prepaid Revenues Commissions receivable a/c 2002 Dec. 31 P & L a/c 1 500 2002 Dec. 31 Bank 1 800 Prepaid bal. c/d 300 300 1 800 2003 Jan. 1 Bal. b/d 300

26. 26 Profit & Loss a/c (extract) $ Gross Profit XXXX Add: Other Revenue 1 500

27. 27 Balance sheet (extract) $ Liabilities and Owner’s Equity Current Liabilities Prepaid Revenue (Commission) 300.

28. 28 Exercise: See worksheet: Prepayments and accruals