Adjustments: Accruals and Bad Debts Flashcards
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What is Accrual Accounting
Accrual accounting involves adjusting of the trial balances accounts.
Adjustments are necessary because the accounting period ends on a specific day.
Under Accrual Accounting what criteria must a balance sheet and a profit and loss account follow?
The balance sheet must list all sets and liabilities at the end of that day
The profit and loss account mist contain all the income and expenses applicable to the period ending on that day.
Some transactions will span the cut off point and some accounts will therefore need to be adjusted. Name 2 adjustments that could be made.
Recognising unrecorded expenses
Allocating recorded costs between two or more accounting periods.
What are unrecorded expenses?
Expenses that are incurred during the accounting period but payable after the end of the accounting period
They are known as an accrual or an accrued charge
Adjusting entry involves an expense account and a liability account
What is the correlation between accruals and expenses/ expenses and prepayments?
Add accruals to expenses
Reduce expenses by prepayments
What is a prepayment?
Payments in the accounting period relating to benefits to be received in a subsequent accounting period.
Adjusting entry involves an asset account and an expense account.
When a business sells goods and allows customers a period of credit in which to pay there is a risk that the money will not be received. Name 2 outcomes in the extent of a loss.
Once it is clear that an amount will not be recovered then a bad debt is recognised
If there is a possibility that some debts may be doubtful then a provision for bad debts is created.
If it is highly unlikely that the debt will ever be recovered the debt should be written off immediately. How does this affect your financial statements?
An expense is included in the profit and loss accouynt for the amount of the debt written off
For the balance sheet the asset (Trade Debtors) is reduced by the same amount
What is a ‘Provision for bad debts’?
There is always a possibility that some debts may become bad
In order to ensure that we do not overstate profit, a provision for bad debts is set up
Provisions are usually calculated as a percentage of the debtors balance at the year end
Within the year in which the provision is first made, what changes are made to the financial statements
The provision for bad debts is deducted from the trade debtors in the balance sheet.
