By S.K Chik

Accruals and Deferrals 1) Accrued Expenses (Expenses Owing) –Expenses due and unpaid at the end of the period –Transfer it to the P & L and shown as a liability in the balance sheet E.g. Advertising accrued $100 as at 31 December 20X6, in addition to $500 paid for the year. 20X6 $ Dec 31 Profit and loss X2 Jan 1 Accrued b /d X6 $ Dec 31 Bank 500 Accrued c /d Advertising

2) Accrued Revenues (Income Receivable) –Revenues not yet received at the end of the period –Transfer it to the P & L and shown as an asset in the balance sheet E.g. Rent $1,100received for 11 months up to 30 November 20X6. 20X6 $ Dec 31 Bank 1,100 Receivable c /d 100 1,200 20X6 $ Dec 31 Profit and loss 1,200 1,200 19X2 Jan 1 Receivable b /d 100 Rent Received

3) Prepayments (Expenses Paid in Advance) –Expenses paid for the following period –Transfer it to the P & L and shown as an asset in the balance sheet E.g. Insurance $1,000 paid in the year, of which $250 is unexpired as at 31 December 20X6 20X6 $ Dec 31 Profit and loss 750 Prepaid c /d 250 1,000 20X6 $ Dec 31 Bank 1,000 1,000 19X2 Jan 1 Prepaid b /d 250 Insurance

4) Deferred Revenues (Income Received in Advance) –Revenues received relating to the following period –Transfer it to the P & L and shown as a liability in the balance sheet

Depreciation and Disposal of Assets Depreciation –Is the part of the cost of the fixed asset consumed during its period of use by the firm –Debit into P & L as a expense Cause: 1)Physical deterioration 2)Obsolescence (out-dated) 3)Inadequacy 4)Depletion 5)Amortization

Methods of Calculating Depreciation Straight Line Method –A fixed amount of depreciation is charged each year Depreciation = Cost of asset – Estimated scrap value Estimated life of asset

Reducing Balance Method –A percentage of the written down value of the fixed asset is charged each year

Example Mr. Foo purchased a new machine of $5,000 for his factory on 1 June 19X1. The year ended of his business is 31 May. Mr. Foo wrote off depreciation directly to the machinery account under the reducing balance method at 10% per annum. (i)Prepare the following accounts: a)machinery, and b)Provision for depreciation on machinery. (ii)Show the extract of the balance sheet as at 31 May 19X2, 19X3 and 19X4. Solution: Machinery 19X1 $ Jun 1 Bank 5,000

Provision for Depreciation- Machinery 19X2 $ May 31 Profit and loss 500 Jun 1 Bal b /d X3 May 31 Profit and loss Jun 1 Bal b /d X4 May 31 Profit and loss 405 1,355 Jun 1 Bal b /d 1,355 19X2 $ May 31 Bal c /d X3 May 31 Bal c /d X4 May 31 Bal c /d 1,355 1,355 (5,000 – 500)X 0.1 (5,000 – 950)X 0.1 5,000 X 0.1

Balance Sheet (Extract) as at 31 May 19X2 19X3 19X4 Machinery 5,000 5,000 5,000 Less: Provision for depreciation ,355 4,500 4,050 3,645

Disposal of Assets The machine was sold on 2 June 19X4 for $4,000. Draw up the accounts for the year ended 31 May 19X5. Solution: Machinery 19X1 $ Jun 1 Bank 5,000 19X1 $ Jun 2 Disposal of machinery 5,000 Provision for Depreciation- Machinery 19X1 $ Jun 2 Disposal of machinery 1,355 19X1 $ Jun 1 Bal b/ d 1,355

19X4 $ Jun 2 Provision for depreciation 1,355 Bank 4,000 5,355 19X4 $ Jun 2 Machinery 5,000 19X5 May 31 Profit and loss 355 5,355 Disposal of Machinery

Provision for Bad Debts Bad Debts –When the debt becomes irrecoverable it is written off as bad –Dr. Bad debts Cr. Debtors At the end of the financial year, the total of the bad debts will be closed to the profit and loss account –Dr. P & L Cr. Bad debts

Provision for Bad and Doubtful Debts The bad debt is known cost to the business. But an adjustment should be made as a provision on the closing value of debtors to anticipate possible losses, typically on a percentage basis. Dr. profit and loss account (with amount of provision increased) Cr. Provision for bad debts account Dr. Provision for bad debts account Cr. profit and loss account (with amount of provision decreased)

Debtors account showed the year- end balances and provision for bad debts was made on these debtors as follow Year $ % on debtors 1 80,000 10% 2 100,000 10% 3 88,000 8% Example:

Year 1 $ Dec 31 Bal c /d 8,000 Year 2 Dec 31 Bal c /d 10,000 10,000 Year 3 Dec 31 Profit and loss 2,960 Bal c /d 7,040 10,000 Year 1 $ Dec 31 Profit and loss 8,000 Year 2 Jan 1 Bal b /d 8,000 Dec 31 Profit and loss 2,000 10,000 Year 3 Jan 1 Bal b /d 10,000 10,000 Year 4 Jan 1 Bal b /d 7,040 Provision for Bad Debts

Year 1 $ Increase in Provision for bad debt 8,000 Year 2 $ Increase in Provision for bad debt 2,000 Year 3 $ Decrease in Provision for bad debt 2,960 Profit and Loss Account for the year ended 31 December

Balance Sheet (Extract) as at 31 December Year 1 Year 2 Year 3 Debtors 80, ,000 88,000 Less: Provision for bad debts 8,000 10,000 7,040 72,000 90,000 80,960

Bad Debts Recovered When a debt previously written off as bad is subsequently paid, the debt may first be reinstated in the personal account, and then the receipt of cash is recorded through the personal account. A bad debts recovered account should be opened as a revenue in the period.

Dr. personal account (debtor) Cr. Bad debt recovered account Dr. bank Cr. Personal account Double entries of bad debt recovered