Balance Day Adjustments Flashcards
Balance day adjustments
Balance day adjustment is a change made to a revenue or expense account on balance day so that revenue accounts show revenues earned and expense accounts show expenses incurred in a particular Period. They include:
- Inventory loss and gains
- Prepaid Expenses
- Accrued Expenses
- Unearned Revenue
- Accrued Revenue
- Bad Debts / Allowance for Doubtful Debts
Pre-adjustment trial balance
A pre-adjustment trial balance is prepared before any balance day adjustments have been recorded in order to detect any errors that may have occurred during the reporting period that don’t involve BDAs.
It’s purpose is to ensure DR = CR before BDAs are made, and take corrective action if errors are found.
Post-adjustment trial balance
After the BDA’s have been recorded in the General Journal and then posted to the General Ledger, another Trial Balance is drawn up to make sure that no errors were made whilst completing the BDA’s. This is called the Post-adjustment Trial Balance.
t’s purpose is to ensure DR = CR after BDAs are made, and take corrective action if errors are found.
Depreciation
the allocation of the cost of a non-current asset over its Useful life.
Depreciation expense
the part of the cost of the non-current asset that has been incurred in the current Period.
Historical cost
the original purchase price of the non-current asset
Residual value (RV)
the estimated economic benefit of the non-current asset that will remain at the end of its useful life.
Useful life (Life)
the estimated period of time for which the non-current asset will be used by the current entity to earn revenue (usually measured in years)
Carrying value
the economic benefit that remains in the asset that is yet to be consumed by the business, plus any estimated residual value
Straight Line Depreciation Formula
3 steps for Allowance for Doubtful debts
Step 1: The initial creation of the “Allowance for Doubtful Debts”
Step 2: The actual “write off” of a debt as bad (not this is not the Bad Debt Expense, rather just a confirmation that the debt is no longer unlikely but is now definitely not going to be received)
Step 3: The “top up” of the “Allowance for Doubtful Debts” in subsequent periods.
Doubtful Debts
A doubtful debt is a debt that is unlikely to be collected in the future but has not yet been ‘written off’ as it has not been confirmed that the Account Receivable is unable to pay.
This estimate is used to make a Balance Day Adjustment for Bad Debts expense.
Income Statement Approach for Allowance for Doubtful Debts
Income Statement approach: based on historical data, this method estimates that a certain percentage of the firm’s Net credit sales in the Period is likely to be uncollectable.
Net credit sales = Credit sales – sales returns
