Adjusting Entries Flashcards
Accrued Expense
Accrual concept: all and only expenses related to the accounting period should be recognised
e.g. electricity, heating and lighting
IS: X Expense (to be calculated)
SFP: Accrued X in Current Liability
(1) Check amount owed in beginning of accounting period
(2) amount paid during accounting period
(3) amount still owed at the end of accounting period
X paid during year + X owed at year end - X owed at year start = IS X expense for the year
e.g. 2011 owed 560 at end of year. 2010 owed 420. Paid 1,620 during year.
IS FYE 30 Sep 2011: 1,760
SFP FYE 30 Sep 2011: 560 (Accrued Electricity, Current Liability)
(420 is expense of 2010, previous year)
Prepaid Expense
e.g. rent and insurance
IS: X Expense (to be calculated)
SFP: Prepaid X in Current Asset (to be calculated)
X paid during year+ X prepaid at year start - X prepaid at year end = IS X expense for the year
(9/12 x 2,700) + 4,000 - (9/12 x 4,000) = 3,025
e.g. paid 4,000 in advance on 30 June 2011. paid 2,700 on 30 June 2010
Early July - End September 2010: 3/12 x 2,700 = 675 for 2010 IS
Early October - End June: 9/12 x 2,700 = $2,025 FOR 2011 IS
Early July - End September 2011: 3/12 x 4,000 = $1,000 FOR 2011 IS
IS FYE 30 Sep 2011: $2,025 + $1,000 = $3,025 Insurance Expense
SFP FYE 30 Sep 2011: $3,000 Prepaid Insurance in Current Asset
Bad Debt & Provision for doubtful debt
Bad Debt
IS: (Bad Debt Expense)
SFP: (Bad Debt Expense) in Trade Receivables
Provision for doubtful debt
IS: (Increase in Provision for Doubtful Debt) or Decrease (negative expense)
SFP: (Provision for doubtful debt) in Trade Receivables
Closing Inventory Valuation
Important
(1) original cost of each item -> cost concept: value inventory AT COST TO BUY/create, unless damaged or obsolete [LOWER OF COST]
(2) inventory condition (sellable?) damaged/obsolete?) -> prudence concept: value inventory at what it can be sold for, less further costs to sell inventory = [NET REALISABLE VALUE]
Original Cost of Closing Inventory
- First-in First-out (FIFO)
- Last-in, First-out (LIFO)
- Average Cost (AVCO) -> Total Cost/Total Units Bought
Mark-up and Margin
Mark-up: % added to cost price = mark-up + cost price = selling price
e.g. $200 cost x 25% = 50 mark-up, 50 + 200 = 250 selling price
e.g. selling price: $800, mark-up: 40%. Cost price?
$800 x 100/140 = $571.43
Margin: % of selling price (relationship btwn cost price and selling price) e.g. mark-up/selling price = 50/250 = 25% of selling price
e.g. selling price: $600, margin: 60%. Cost price?
$600 x 60% = $360 profit. $600 - $360 = $240 cost
Or just $600 x 40% (remainder of margin %) = $240
e.g. COS: $70k, margin 30%. Sales?
Sales: 70,000 / 0.7 (remainder of margin %) = 100,000
GP: sales - COS = 100k - 70k = 30k
*Inventory must be expressed in cost price in SFP (Inventory) and IS (COGS)
Depreciation of NCA
Matching Concept: to match the purchasing cost to the revenue the NCA generates
Straight-line
X = (Purchasing Cost - Residual Value)/Useful Economic Life (years)
or X = Purchasing Cost - Residual Value x Depreciation rate %
Reducing Balance
X for year n = Depreciation rate % x Net Book Value (at start of year n)
IS: Depreciation Expense
SFP: NCA Cost - Accumulative Depreciation (+ New Depreciation Charge) = Net Book Value
Disposal of NCA
Don’t charge depreciation for asset being disposed in year of disposal
IS: Other Expenses: Profit/Loss on Disposal (= NBV - Sales Proceeds)
SFP:
NCA: Original Cost and Accumulated Depreciation to be
removed on date of disposal
CA: Cash: Proceeds of Sale *ONLY IF it hasn’t been accounted for
Revaluation of Land & Buildings
SFP:
NCA:
Property at Cost D
Less: Accumulative Depreciation D
Equity:
Revaluation Reserve C
Statement of Movements in Equity:
Revaluation Reserve
X Revaluation (+/-)
Closing Balance
Taxation
Sole proprietors and partnerships =/ tax on profits but tax falls on owners
Limited liability company = tax on profits
Tax Expense = payable in following year
IS:
Profit Before Interest & Taxation
Less: Taxation
= Profit After Taxation
SFP:
CL:
Taxation Liability
Paying off last year’s tax (underprovision)
IS:
Less: Other Expenses
Underprovision for Previous Year Tax (expense, overprovision: income)
SFP:
CA: (Cash)
CL: (Taxation Liability)
If provision (under/over) for taxation in 20X1: wrong, taxation will appear in 20X2 Trial Balance
Interim Dividend and Final Dividend
Interim dividend: 2nd half of year
Final dividend: 1st half of next year
In Statement of Movement in Equity:
Dividend paid: total of interim this 2nd half of year + final dividend of last year
Preference Share Dividends
Income Statement w/ loan interests if any
If unpaid will be accrued
In SFP:
Non-Current Liability
In IS:
Interest Expense
Unpaid Preference Dividends: accrued as CL in SFP
Issue of Share Premium
Condition: market value of shares is high enough
Premium: price > par/face value
Share Premium: difference btwn new shares price vs nominal value of such shares
In SFP
Equity:
Ordinary Share Capital (shares issued at par value)
Share Premium (shares issued x excess price)
Issue of Rights Share
Bc existing shareholders’ voting rights dilute when new shares are issued
Is: offering of new shares only to existing shareholders where they can accept or sell such rights to someone else/open market
+maintains existing shareholders’ voting rights
+cheaper to arrange
Issue of Bonus/Scrip Shares
No exchange of cash, not to raise finance
Done when
(1) want to lower market value of each share
(2) have built up resereves in SFP that won’t be distributed to owners
+Lowers market value of each share such that investors find it easier to buy/sell shares
+investors may consider it less risky to hold shares -> helps maintain total market value capitalisation (total market value of company)
In SFP
Cr Share Capital (shares issued x par value)
Dr Share Premium (shares issued x excess value)
Dr Revaluation Reserve (and Retained Profits if necessary)
