1. ADJUSTMENTS: BAD DEBTS
REV 01
When a business sell goods on credit, debtors are created.
There are always some who will not be able or are unwilling to repay the amount owing by them.
The reasons for this may include financial difficulties or dishonesty.
The debt is said to be uncollectible by the business.
The amount that is proven to be uncollectible will be considered as bad debt expense or uncollectible account.
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2. DDW 1313 FINANCIAL ACCOUNTING 1
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The business will record the following journal entry:
Dr. Bad debts expense xxx
Cr. Debtors xxx
At the end of the accounting period, bad debts expense will be closed to the profit and loss account.
Dr. Profit and loss xxx
Cr. Bad debts expense xxx
To transfer bad debts expense to profit and loss
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3. ADJUSTMENTS: PROVISION FOR DOUBTFUL DEBTS
REV 01
This account is used only for estimates of the amount of the debtors remaining at the year end after the bad debts have been written off that are likely to finish up as bad debts.
Provision for doubtful debt account are kept separated from bad debts account.
The amount for provision is on the basis of the best guess that can be made (on a percentage of year-end debtors).
At the end of the first year of business, the adjusting journal entry needed to record is:
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4. DDW 1313 FINANCIAL ACCOUNTING 1
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Dr. Doubtful debts expense xxx
Cr. Provision for doubtful debts xxx
(To create a provision for doubtful debts account)
To close the doubtful debts expense account to the profit and loss account as follows:
Dr. Profit and loss xxx
Cr. Doubtful debts expense xxx
In the balance sheet, the debtors figure is reduced by the amount that is estimated to be uncollectible.
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5. ADJUSTMENTS: PROVISION FOR DISCOUNTS ON DEBTORS
REV 01
Cash discounts given to customers by a business for early payment.
In a situation where debtors are given credit term ‘1/10, net 30’, it means that if the customer pays his debt within 10 days from the date of purchase (I.e. during the discount period), he gets a 1% discount off the invoice price involved.
If he does not pay within 10 days from the date of purchase, the last day to pay the invoice price is 30 days from the date the credit sale was made.
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6. DDW 1313 FINANCIAL ACCOUNTING 1
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Some businesses create provisions for cash discounts to be allowed on the debtors outstanding.
As the amount of the debtors less any doubtful debt provision is not the best estimate of collectable debts, owing to cash discounts which will be given to debtors if they ay within a given time.
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7. DDW 1313 FINANCIAL ACCOUNTING 1
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8. ADJUSTMENTS: DEPRECIATION OF FIXED ASSET
REV 01
Depreciation is that part of the original cost of a fixed asset that is consumed during its period of use by the business.
The two main methods in used are the straight line method and the reducing balance method.
Based on the straight line methods, the number of years of use is estimated. The cost is then divided by the number of years, to give the depreciation charge each year.
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9. DOUBLE ENTRY RECORDS FOR DEPRECIATION
REV 01
Accumulated provision for depreciation account is the account to record the depreciation to date.
The depreciation is posted directly into the cummulative provision for depreciation account. The double entry is:
Dr. Profit and loss account
Cr. Accumulated provision for depreciation acc.
The depreciation for the period being posted to the profit and loss account is being desecrated as ‘depreciation’.
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10. ACCRUALS AND PREPAYMENTS
REV 01
ACCRUED EXPENSES
Under normal circumstances, most of a business’s expenses incurred are recorded when payment is made.
However, there are some expenses that are incurred during the accounting period but not yet paid at the end of the accounting period.
These expenses incurred but not yet paid, have not been recorded at all.
Therefore, these expenses incurred must be recorded at the end of the financial period.
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11. DDW 1313 FINANCIAL ACCOUNTING 1
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ACCRUED REVENUES RECEIVABLE
Usually, most revenues of a business are recorded at the time goods and/or services are provided to a customer, regardless of whether payment has been received or not.
However, at the end of the accounting period, some revenues earned may not yet recorded.
These are called accrued revenues receivable.
An accrued revenue receivable is a current asset.
Dr. Accrued revenue receivable xxx
Cr. Revenue xxx
Being record of accrued revenue receivable.
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12. DDW 1313 FINANCIAL ACCOUNTING 1
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REVENUE RECEIVED IN ADVANCE
Revenue received in advance is a receipt of payment for which goods have not been provided and is deemed as a current liability.
Alternative terms of revenues received in advance are prepaid revenues, deferred revenues and unearned revenues.
At the time of the receipt of payment in advance, the journal entries:
Dr. Cash/Bank
Cr. Revenue Account
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13. DDW 1313 FINANCIAL ACCOUNTING 1
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At the end of the accounting period, it is possible that some of the revenue received in advance will have earned and a portion of it not yet earned.
The journal entries involves:
Dr. Revenue XXX
Cr. Revenue received in advance XXX
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14. DDW 1313 FINANCIAL ACCOUNTING 1
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PREPAID EXPENSES
Prepaid expenses are expenses paid in advance.
Prepaid expenses are actually economic resources and therefore are current asset as they are expected to be used up in the business’s current period.
Examples of prepaid expenses include prepaid insurance (unexpired insurance), prepaid rent and prepaid advertising.
One way of treating a prepaid expense is to record it as an expense on the date of payment with a journal entry as follow:
Dr. Expense XXX
Cr. Bank/Cash XXX
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15. DDW 1313 FINANCIAL ACCOUNTING 1
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At the end of the accounting period, the adjusting entry involves a debit to a prepaid expense account, which is a current asset account and a credit to the related expense account.
Dr. Prepaid Expense XXX
Cr. Expense XXX
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