End of Period Adjustments Principles of Accounts CSEC Syllabus Section 6 all rights reserved ram@08

all rights reserved ram@08 Prepayments Prepayments should be deducted from their named expense in the Profit & Loss account When an expense is paid in advance – the advance payment is connected to an event which has not yet occurred. Thus it can not be matched with any event in this current period. Be sure only to deduct the amount by which the expense is overpaid at the end of the period. Section 6:obj 4 The light account from Jan 1, 2006 to Dec 31, 2006 totalled $750, however the clerk had paid the light company up to Jan 1, 2007 with a cheque for $800. Here we see that the light account carries $50 which covered a period that has not yet occurred (Jan 2007). Bal b/d 0 L&P 750 Bank 800 800 Prepaid 50 In the P & L account EXPENSES: $ $ $ Light (800 – 50) 750 all rights reserved ram@08

all rights reserved ram@08 Prepayments Prepayments should be treated as current assets on the Balance Sheet Since the expense has already been paid for – it implies that we have a right to that service ( the provider owes us – he /she is our “debtor”) Note that only the amount claimed as prepaid constitute the current asset. Section 6:obj 5 The light account from Jan 1, 2006 to Dec 31, 2006 totalled $750, however the clerk had paid the light company up to Jan 1, 2007 with a cheque for $800. Bal b/d 0 L&P 750 Bank 800 800 Prepaid 50 In the P & L account EXPENSES: $ $ $ Light (800 – 50) 750 $ Current Assets Prepaid light 50 all rights reserved ram@08

all rights reserved ram@08 Accruals Accruals should be added to their named expense in the Profit & Loss account. When an expense remains unpaid at the cut-off date (end of period) it still represents an event which has already occurred. Thus it matches the records but it is now accrued. Be sure only to add the amount by which the expense is still unpaid at the end of the period. Section 6:obj 4 The rent for the office is $2000 a year, however at the end of 2006 the clerk had only paid $1500 to the BIDC by cheque. Here we see that the rent account carries an outstanding debt of $500 even though the office was used for the whole year(2006). Bank 1500 BIDC 2000 2000 Accrued 500 In the P & L account EXPENSES: $ $ $ Rent (1500+ 500) 2000 all rights reserved ram@08

all rights reserved ram@08 Accruals Accruals should be treated as current liabilities on the Balance Sheet. Since the expense was consumed during the period, but we did not pay for it then, we have an obligation to settle that debt. (we owe the provider – he/she is our “creditor”) Note that only the amount which is still outstanding constitutes the current liability. Section 6:obj 5 The rent for the office is $2000 a year, however at the end of 2006 the clerk had only paid $1500 to the BIDC by cheque. Bank 1500 BIDC 2000 Accrued 500 2000 In the P & L account EXPENSES: $ $ $ Rent (1500+ 500) 2000 $ Current Liabilities Accrued Rent 500 all rights reserved ram@08

all rights reserved ram@08 Bad Debts debtors’ balances still due, which management deem as being impossible to collect. This may occur where a debtor has become bankrupt and thus has no finances to pay OR where there is a debtor who bluntly refuses to settle an outstanding debt. The debts are written off [removed from the books’ assets] so that they would not distort the liquidity of the firm. The written off debts (called Bad Debts) are then treated as an expense [since it is the “cost of not being paid”]; and so listed on the Profit & Loss account. Section 6:obj 6 J Jones owed Busette Store $300 since 2002. Busette has made every effort to recover the debt but Jones is still unable to pay. Thus the decision was made to write off his debt. Here we see that a bad debt exist and the owner is convert it from asset to expense. Bad Debts a/c Jones 300 P & L 300 Profit & Loss a/c Bad Debts 150 In the P & L account EXPENSES: $ $ $ Bad Debts 300 all rights reserved ram@08

Prov. Doubtful Debts a/c An estimated percentage of debtors’ balances still due, which management anticipate as being impossible to collect. In order to truly reflect the status of a firm’s assets and profits at the end of the period... An analysis is made about the ageing and collection of debts... Where upon an adjustable estimate is made relative to true debtors’ balance. The provision for doubtful debts are thus treated as an expense [since it is the “cost of not being paid”]. The provision for doubtful debts are then deducted from the disclosed debtors’ balance on the Balance sheet. Section 6:obj 6 Lashley Co has total debtors of $5000 at the end of 2006, his analysis of those accounts led him to believe that 3% of this balance is uncollectible. Here we see that a provision for doubtful debts is being created in order to properly reflect what is happening in the firm. Prov. Doubtful Debts a/c P & L 150 Profit & Loss a/c Doubtful Debts 150 In the P & L account EXPENSES: $ $ $ Prov. Doubtful Debts (5000*.03) 150 In the Balance Sheet Current Assets: $ $ $ Debtors Less provision (5000-150) 4850 all rights reserved ram@08

Depreciation The expense consumed for the use of a fixed asset. [note that the original cost of a fixed asset generally includes its depreciation factor] When a fixed asset is used, the cost of using it can occur due to Wear and tear Decadence (such as rusting, rotting, etc) Obsolescence (no longer useful to the firm) Although actual depreciation is unknown, a provision is made for the expense incurred during its life to reflect the present value of the asset. Provision for Depreciation is calculated using The Straight-line Method The Reducing Balance Method Section 6:obj 8 The Straight-Line Method * The depreciation expense is deducted by a constant value [same amount] annually. Cost of asset less its disposal value Number of years of use Cost – disposal value Life span The Reducing Balance Method The depreciation expense is deducted by a different value [same rate] annually. Cost of asset (yrx) less [cost of asset (yrx) times the rate of depreciation] Cost (x) – [cost(x) * depr rate] all rights reserved ram@08

all rights reserved ram@08 Provision for Depreciation Provision for depreciation should be treated as an expense on the Profit & Loss account. Remember it is the cost calculated as being consumed while using the fixed assets of the firm. [it is not actual money... It is simply a book figure] Note that only the amount calculated as the expense for that period is to be used on the Profit & Loss account. Section 6:obj 9 A piece of equipment was bought by King Kuts for $25000. That type of equipment can be resold after 6yrs for $7000. Calculate the depreciation expense for the first 2 years. Cost –disposal value Life span 25000 – 7000 = 3000 6 Provision for Depreciation Yr1 bal 3000 P & L 3000 Yr2 Bal (accum.) 3000 bal 6000 P & L 3000 Profit & Loss a/c Prov Depreciation 3000 Yr2 all rights reserved ram@08

all rights reserved ram@08 Provision for Depreciation Provision for depreciation should be deducted from the named fixed asset on the Balance sheet. Remember the aim is to adjust the present value of the asset... In other words give the asset a book value. Note that the accumulated amount of depreciation provided as the expense is deducted from the cost of the asset on the Balance Sheet. Section 6:obj 9 A piece of equipment was bought by King Kuts for $25000. That type of equipment can be resold after 6yrs for $7000. Show the value of the asset after the first 2 years. Provision for Depreciation Yr1 bal 3000 P & L 3000 Yr2 Bal (accum.) 3000 bal 6000 P & L 3000 Yr 1 $ Fixed Assets Equipment (less prov) [25000 -3000] 22000 Yr 2 $ Fixed Assets Equipment (less prov) [25000 -6000] 19000 all rights reserved ram@08

Provision for Depreciation Provision for depreciation should be treated as an expense on the Profit & Loss account. Remember it is the cost calculated as being consumed while using the fixed assets of the firm. [it is not actual money... It is simply a book figure] Note that only the amount calculated as the expense for that period is to be used on the Profit & Loss account. See previous slide for Balance sheet action Section 6:obj 9 A vehicle was bought by RoachForde Inc for $25000. That type of vehicle used depreciated at 25% per annum. Calculate the depreciation expense for the first 2 years on a diminishing value. 25000 –(25000 * .25) =25000 – 6250 18750 – (18750 *.25) = 18750 - 4688 Cost (x) – [cost (x) * rate] Provision for Depreciation Yr1 bal 6250 P & L 6250 Yr2 Bal (accum.) 6250 bal 10938 P & L 4688 Profit & Loss a/c Prov Depreciation 6250 Yr2 Prov Depreciation 4688 all rights reserved ram@08