End of period reports


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End of period reports

  1. 1. Balance Day Adjustments RD1 End of Period Reports
  2. 2. The Accounting Process Source Document Journals Transaction Ledger Trial Balance Balance Day Adjustments Final Reports Reversing Entries Profit and Loss Summary
  3. 3. Matching Principle The Accounting Period Assumption divides the life of an enterprise into arbitrary time periods. Accountants accept that the life of a business is indefinite. For this reason it is necessary to divide the business’s life into periods at the end of which earning capacity and financial stability can be determined. The Matching Principle is a concept inherent in the Accounting Period Assumption.
  4. 4. Matching Principle The matching principle states that revenues earned in the period should be matched to expenses incurred. This allows the determination of profit for the period. Given that, during the period, this does not occur neatly (eg revenue earned may not be received until the next period) it is necessary to adjust these revenue and expense accounts.
  5. 5. Balance Day Adjustments <ul><li>Prepaid Expenses </li></ul><ul><li>Accrued Expenses </li></ul><ul><li>Unearned Revenues </li></ul><ul><li>Accrued Revenues plus </li></ul><ul><li>Inventory Discrepancies </li></ul><ul><li>Depreciation </li></ul><ul><li>Doubtful Debts </li></ul>
  6. 6. 1. Prepaid Expenses <ul><li>Prepaid Expenses are expenses that are paid before they are incurred. Increase Prepaid Expense (Asset) Dr/Decrease expenses Cr </li></ul><ul><li>BDA: Paid rent for six month 1 Feb of $1200. </li></ul><ul><li>a prepaid expense or accrued expense? </li></ul><ul><li>prepaid expense </li></ul><ul><li>b how much? </li></ul><ul><li>1 months worth  1200/6 = 200 </li></ul><ul><li>c Prepaid Expense Dr 200 </li></ul><ul><li> Rent Expense Cr 200 </li></ul>
  7. 7. 1. Prepaid Expenses <ul><li>You try: </li></ul><ul><li>Council rates of $1200 for the quarter were paid on 1 May. </li></ul><ul><li>Prepaid Expense Dr 400 </li></ul><ul><li>Rates Cr 400 </li></ul><ul><li>Four months’ advertising totalling $860 is paid on 1 April. </li></ul><ul><li>Prepaid Expense Dr 215 </li></ul><ul><li>Advertising Cr 215 </li></ul>
  8. 8. 2. Accrued Expenses <ul><li>Accrued expenses are costs that have been incurred in the current period but not yet paid. Increase Expense Dr/Increase Accrued Expenses (Liability) Cr </li></ul><ul><li>BDA: Wages are paid weekly, $2000, each Friday for a 5 day working week. June 30 falls on a Tuesday. </li></ul><ul><li>a prepaid expense or accrued expense? </li></ul><ul><li>accrued expense </li></ul><ul><li>b how much? </li></ul><ul><li>2 days worth  2000/5 = 400 (wages per day) x 2 = $800 </li></ul><ul><li>c Wages Dr 800 </li></ul><ul><li> Accrued Expense Cr 800 </li></ul>
  9. 9. 2. Accrued Expenses <ul><li>You try: </li></ul><ul><li>Nina borrows $10 000 on 1 August at 7.75% per annum. The loan agreement requires her to pay interest every three months. </li></ul><ul><li>10000 * .0775 = 775 interest per annum. 775/12 = 65 interest per month. Interest must be paid end Oct, Jan, Apr, July - therefore 2 months accrued interest by June 30. </li></ul><ul><li>65 * 2 = 130 </li></ul><ul><li>Interest Expense Dr 130 </li></ul><ul><li>Accrued Expense Cr 130 </li></ul><ul><li>Sales during June amounted to $4 600. Commission is paid to sales personnel at 3% of sales. Commission for June is still to be paid. </li></ul><ul><li>4600 * .03 = </li></ul><ul><li>Commission Expense Dr 138 </li></ul><ul><li>Accrued Expense Cr 138 </li></ul>
  10. 10. 3. Unearned Revenue <ul><li>Unearned revenues are revenues for which the cash has been received before the business has earned the revenue. Decrease revenues Dr/Increase Unearned Revenue (Liability) Cr </li></ul><ul><li>BDA: On May 1, 2006 Regina receives six months’ commission of $3 600 from an agency. </li></ul><ul><li>a unearned revenue or accrued revenue? </li></ul><ul><li>unearned revenue </li></ul><ul><li>b how much? </li></ul><ul><li>3 600/6 = 600 commission per month  600 * 4 = 2 400 </li></ul><ul><li>c Commission Revenue Dr 2 400 </li></ul><ul><li> Unearned Revenue Cr 2 400 </li></ul>
  11. 11. 3. Unearned Revenue You try: The business leases out part of its building for $25 200 per annum. The tenant pays quarterly in advance. The last payment was received on 1 May 2007. Rent Revenue Dr 2 100 Unearned Revenue Cr 2 100 Commission of 5% was paid in advance on anticipated sales of $40 000. Commission Revenue Dr 2 000 Unearned Revenue Cr 2 000
  12. 12. 4. Accrued Revenues <ul><li>Accrued revenues are revenues that have been earned in the current financial period but not yet received. Increase Accrued revenues Dr (Asset)/Increase Revenue Cr </li></ul><ul><li>BDA: Regina had $30 000 invested at an interest rate of 5% per annum. </li></ul><ul><li>Interest for the month of June had not yet been received. </li></ul><ul><li>a unearned revenue or accrued revenue? </li></ul><ul><li>accrued revenue </li></ul><ul><li>b how much? </li></ul><ul><li>30 000 * .05 = 1 500 interest per annum  1 500/12 = 125 per month </li></ul><ul><li>c Accrued Revenue Dr 125 </li></ul><ul><li> Interest Revenue Cr 125 </li></ul>
  13. 13. 4. Accrued Revenue You try: In February 2007, the business successfully sued Ajax Co for $160 000. The court ordered payment be made by 31 May 2007. To date, two-thirds of the amount has been received. Under the court order, any amounts not paid by this date will accrue interest at the rate of 5% per annum. Accrued Revenue Dr 53 555 Income from law suit Cr 53 333 Interest revenue Cr 222 The business has $45 000 invested in a bank account that pays monthly interest at 3% per annum. As at 30 June, interest for June had not been received. Accrued Revenue Dr 113 Interest Revenue Cr 113
  14. 14. 5. Inventory Discrepancies <ul><li>Often stock takes reveal differences between recorded amounts of stock on stock cards and actual stock held. </li></ul><ul><li>Such discrepancies are accounted for on balance day as a balance day adjustment. </li></ul><ul><li>Shortage: Inventory Adjustment (COGS expense)Dr/Inventory Control Cr </li></ul><ul><li>Surplus: Inventory Control Dr/Inventory Adjustment (revenue) Cr </li></ul><ul><li>BDA: Inventory Control $45 698 as listed in trial balance 30 June. Stock take reveals $45 190. </li></ul><ul><li>Inventory Adjustment Dr 508 </li></ul><ul><li>Inventory Control Cr 508 </li></ul>
  15. 15. 5. Inventory Discrepancies <ul><li>You try: </li></ul><ul><li>Ashgrove Physiotherapy holds a small amount of stock. The stock records are shown below: </li></ul><ul><li>Bandages $6 each 17 Tubes of Cream $10 each </li></ul><ul><li>6 Splints $50 each </li></ul><ul><li>A stock take reveals 95 bandages, 15 tubes of cream and 5 splints </li></ul><ul><li>Inventory Adjustment Dr 100 </li></ul><ul><li>Inventory Control Cr 100 </li></ul>
  16. 16. 6. Depreciation <ul><li>Depreciation is the means by which the cost of a non-current asset is spread over the life of that asset. Depreciation (expense) Dr/Accumulated depreciation (-ve Asset) Cr </li></ul><ul><li>Given that assets are used by the business to help earn revenue for a number of years, part of the original cost of the asset is matched against the revenue earned in each financial year of it’s life. This charge is recorded on balance day – June 30. </li></ul><ul><li>2 methods: Straight line (OC – RV)/y </li></ul><ul><li>Diminishing Balance Diminished balance * rate </li></ul><ul><li>(diminished balance = OC – Acc Depn) </li></ul>
  17. 17. 6. Depreciation <ul><li>Trial Balance Debit Credit </li></ul><ul><li>Motor Vehicle 50 000 </li></ul><ul><li>Acc Depn 5 000 </li></ul><ul><li>Equipment 20 000 </li></ul><ul><li>Acc Depn 3 000 </li></ul><ul><li>Assets are depreciated as follows: </li></ul><ul><li>Motor Vehicle 15% reducing balance </li></ul><ul><li>Equipment 10% straight line </li></ul><ul><li>MV: (50 000-5 000) * .15 = 6750 </li></ul><ul><li>Equip: 20 000 * .1 = 2 000 </li></ul><ul><li>Depreciation – Vehicle Dr 6750 </li></ul><ul><li>Accumulated Depn - Vehicle Cr 6750 </li></ul><ul><li>Depreciation - Equipment Dr 2 000 </li></ul><ul><li>Acc. Depn - Equipmetn Cr 2000 </li></ul>
  18. 18. 6. Depreciation <ul><li>You try: </li></ul><ul><li>On 1 July the business had motor vehicles valued at $66 000 and a balance in the acc depn a/c of $4 000. Depreciation is charged annually at 15% reducing balance. </li></ul><ul><li>(66 000 – 4 000) * .15 = 9 300 </li></ul><ul><li>Depreciation Dr 9 300 </li></ul><ul><li>Acc Depn Cr 9 300 </li></ul><ul><li>On 31 March 2007, Fargo purchased a new delivery vehicle valued at $45 000 with a residual value of $10 500. The reducing balance method of depreciation is to be applied at 25% per annum. </li></ul><ul><li>45 000 * .25 = 11 250 for year </li></ul><ul><li>3 months depn = (11 250/12) * 3 = 2 813 </li></ul><ul><li>Depreciation Dr 2 813 </li></ul><ul><li>Acc Depn Cr 2 813 </li></ul>
  19. 19. 7. Doubtful Debts <ul><li>Bad debts represent accs rec’s outstanding balance which is deemed will not be received </li></ul><ul><li>The bad debts a/c in the ledger shows the total amount of actual bad debts written off during the period. </li></ul><ul><li>The matching principle requires that the bad debts expense be recorded in the same accounting period as the revenue earned from the credit sales to which the debt relates. </li></ul><ul><li>To facilitate this an estimate is made of the amount of accs rec from the current period that may not be collected. These may become bad debts, that is, they are doubtful debts . </li></ul><ul><li>Doubtful debts (expense) are created to record the estimated amount of bad debts arising from the current accounting period. </li></ul><ul><li>To permit doubtful debts to be raised a PROVISION FOR DOUBTFUL DEBTS (-ve Asset) is created. </li></ul><ul><li>Provision for doubtful debts records debts that are unlikely to be collected. As a negative asset it has the effect of reducing the accounts receivable value in the Balance Sheet. </li></ul>
  20. 20. 7. Doubtful Debts <ul><li>Trial Balance Debit Credit </li></ul><ul><li>Bad debts 680 180 </li></ul><ul><li>Accs Rec Control 23 000 </li></ul><ul><li>Prov for Doubt Debts 500 </li></ul><ul><li>Provision for doubtful debts 5% of Accs Rec. </li></ul><ul><li>1 Transfer bad debts to provision for doubtful debts (up to amount of provision). Amt. in provision represents doubtful debts from previous period. This transfer removes these debts from the bad debts a/c because they represent an expense belonging to previous accounting period. </li></ul><ul><li>Prov. For Doubt. Debts Dr 500 </li></ul><ul><li>Bad Debts Cr 500 </li></ul><ul><li>Calculate provision for current period. </li></ul><ul><li>Doubtful Debts Dr 1 150 </li></ul><ul><li>Prov. For Doubt Debts Cr 1 150 </li></ul>
  21. 21. 7. Doubtful Debts <ul><li>You try: </li></ul><ul><li>Accounts Receivable control a/c had a balance of </li></ul><ul><li>$45 000. The provision for doubtful debts showed a balance of $1 500. During the financial year $1 900 was written off as bad debts. The desired provision is 5% of accounts receivable control. </li></ul><ul><li>Provision for Doubt.Debts Dr 1 500 </li></ul><ul><li>Bad Debts Cr 1 500 </li></ul><ul><li>Doubtful Debts Dr 2 250 </li></ul><ul><li>Provision for Doubt. Debts Cr 2 250 </li></ul>