chapter 5: accounting adjustments 1 Flashcards
what do the accruals basis of accounting incorporate
both the accruals and matching concepts:
- income and expenses are recognised in the IS in the period in which they are incurred or earned
- costs (expenses) are recognised in the IS in the same period as the income they help to generate
what is the cost of sales figure (equation)
cost of sales = opening inventory + purchases - closing inventory
what is included in the trading account
(found at the top part of the IS)
sales revenue above the cost of sales
- difference between these: gross profit
how is bad debts written off
when the debt is no longer collectible, it is written off = involves
1. reducing the receivale
2. increasing the expenses
how is an account provision for doubtful debt shown
- shown as an expense in the income statement
- deducted from the total receivables figure in the SOFP
the provision for bad debts can either be estimated as a percentage of sales for the year ( income statement approach) or a percentage of the total receivables (SOFP approach)
what happens when a bad debt is unexpectedly paid
when the bad debt written off as bad in one accounting period is subsequently repaid in another, the amount paid should be recorded as additional income in the income statement of the period in which the payment is received
trade receivables: 30,250
provision for doubtful debt: 1,512
total of 5000 if trade receivables are to be written off and the provision adjusted to 10% of trade receivables
what the relevant final balances
1) expense in income statement
- bad debt = 5000
- doubtful debt = (30,250-5000)10% - 1512 =1,013
2) trade receivables in SOFP
- trade receivables = 25,250
- provision for doubtful debt = 25,250(10%) =2,525
what is the double entry for discounts allowed
Dr discounts allowed
Cr accounts receivables
what is the double entry for discounts received
Dr accounts payables
Cr discounts received
