Journals and Key Formulas Flashcards
Journal for disposals given in a part exchange
Step 1: Remove cost of disposed asset from cost ledger (as before)
Dr Disposals account £ cost
Cr Non-current cost account £ cost
Step 2: Remove accumulated depreciation from the accumulated depreciation ledger (as before)
Dr Accumulated depreciation account £ accumulated depreciation
Cr Disposals account £ accumulated depreciation
Step 3: Account for the disposal proceeds (replace cash with trade in value)
Dr New asset cost account £ part exchange allowance
Cr Disposals account £ part exchange allowance
The remaining cash paid (after the part exchange allowance) for the new asset is then accounted for in the usual way:
Dr New asset cost account £ cash paid
Cr Cash £ cash paid
Accounting Equation
Assets = Liabilities + Equity(Capital)
Assets – liabilities = Equity
Net assets = Equity
Profit Formula
Assets - Liabilities - Opening Capital + Drawings
Gross Wage Formula
Gross Wage = PAYE + Employee NI + Net Wage
Wages and Salaries Expense/Employees Gross Salary Formula
Wages and Salaries Expense/Employees Gross Salary = PAYE + Employee NI + Employers NI + Cash to employees
Wages Cost Formula
Wages Cost = Employees gross pay + employers NI
DEAD CLIC
Debits INCREASE
Expenses (SOPL) :(
Assets (SOFP) :)
Drawings (SOFP)
Credits INCREASE
Liabilities (SOFP) :(
Income (SOPL) :)
Capital (SOFP)
SOFP = GROSS
SOPL = NET
Sale
DR Trade Rec/Cash
CR Sales Income
Sales Returns
Dr Sales Returns (or Sales)
Cr Trade receivables
Purchase
Cr Trade payables (liability)
Dr Purchase Expense
Purchase returns
Dr Trade payables
Cr Purchase returns (or Purchases)
Contra
WILL ALWAYS BE THIS, THERE IS NO OPPOSITE
Dr Trade payables
Cr Trade receivables
Refund to customers
Dr Trade receivables
Cr Cash
Refund to suppliers
Dr Cash
Cr Trade payables
Dishonoured cheque Journal
Dr Trade receivables
Cr Cash
Cost of Sales Proforma Layout
Formula
Which financial statement does this affect
See FC
Cost of Sales = Opening inventories + Purchases + Carriage Inwards (deliveries) - Closing inventories
So how many did we start with - how many we have left over - how much did it costs us to get everything
We then use this to calculate cost of sales which is in our Statement of Profit or Loss
Page 66 in ICAEW FI WB
Revenue Formula
REVENUE = SALES
Sales = Gross profit + Cost of Sales
Sales Formula
REVENUE = SALES
Sales = Gross profit + Cost of Sales
Gross Profit Formula
Gross profit = Sales (Revenue) - Cost of Sales
Net Profit Formula
Net profit = Gross profit - Other expenses
Purchases goods (inventories)
Dr Purchase expenses
Cr Trade payables / cash
Year end closing inventories
Account for year end closing inventories as follows
Dr Inventories (current asset) account £ closing inventories
Cr cost of Sales expense £ closing inventories
ONLY THESE TWO LEDGER ACCOUNTS ARE TOUCHED FOR YEAR END/OPENING INVENTORY, ANYTHING ELSE IS INCORRECT
Reverse out opening inventories
Reverse out opening inventories as follows
Dr Cost of sales expense £ opening inventories
Cr Inventories (current asset) account £ opening inventories
ONLY THESE TWO LEDGER ACCOUNTS ARE TOUCHED FOR YEAR END/OPENING INVENTORY, ANYTHING ELSE IS INCORRECT
Closing Inventory Formula
Closing inventory = Quantity (No of units/Stock Count) x Valuation (NRV)
NRV is NET REALISABLE VALUE = Sales price - Cost to complete
NRV Formula
Closing inventory = Quantity (No of units/Stock Count) x Valuation (NRV)
NRV is NET REALISABLE VALUE = Sales price - Cost to complete
Mark Up
MARK UP is calculated on COSTS
if the markup is on costs
Costs = 100%MARK UP is calculated on COSTS
if the markup is on costs
Costs = 100%MARK UP is calculated on COSTS
if the markup is on costs
Costs = 100%
We then draw out the table for Sales, Cost of Sales and Gross
if the markup was 40%
Sales = 140%
Cost of Sales = 100%
Gross = 40%
we can then work out the £ value from here
Formula: Sales - Cost of Sales = Gross profit
Margins
MARGINS is calculated on SALES
if the margins is on sales
Sales = 100%
We then draw out the table for Sales, Cost of Sales and Gross
if the margin was 40%
Sales = 100%
Cost of Sales = 60%
Gross = 40%
we can then work out the £ value from here
Formula: Sales - Cost of Sales = Gross profit
Writing off inventories
If inventory is correctly valued at the lower of cost and NRV, no further inventory “write-down” journal entries are needed.
In the rare situation where a material amount of inventory has been stolen or destroyed then then the usual treatment of inventories would unfairly distorted view of the entities gross profitability.
To overcome this, the cost of the goods stolen or destroyed is removed from purchases (COST OF SALES) and shown in other expenses below the gross profit line.
Dr Other expenses £x
Cr Purchases £x
Any insurance the entity has against the loss is recorded as:
Dr Cash/Receivables £x
Cr Other income £x
If an owner takes something from the business as drawings what is the journal entry?
Dr Drawings £ cost of items
Cr Purchases £ cost of items (don’t be tempted to credit inventories)
WE DO NOT TOUCH INVENTORIES - Q MIGHT TRY TO TRICK US
Irrecoverable debts
Dr Irrecoverable debt expense
Cr Trade receivables
Dr Irrecoverable debt expense (often included as part of other expenses - administrative expenses)
Cr Trade receivables
As they no longer owe us as we have moved it to the debt account -moved off memorandum (individual client) ledger
Irrecoverable debts is paid
In the rare situation that an irrecoverable debt subsequently paid, the double entry is:
Dr Cash
Cr Irrecoverable debt expense
If we break it down
- The original writing off the debt is DR Irrecoverable debt expense and then CR Trade rec
- To reverse this we Dr Trade Rec and then Cr Irrecoverable debt
- Then to post the cash we DR cash and Cr Trade Rec
The positing in the trade rec account is a DR then CR so these balance each other out so instead what we do is
Allowance receivables Formula
So allowance receivables = Trade Rec - Irrecoverable debt
Then we calculate the allowance from that figure
Allowance for receivables
Dr Irrecoverable debt expense
Cr Allowance for receivables
We Dr Irrecoverable debt expense due to accounting concept of prudence - we want to recognise cost up front of customers not paying
WE NEVER TOUCH TRADE REC - AS WE DON’T WANT TO REDUCE THIS AS WE ARE DOUBTFUL THEY WILL PAY SO WE ARE NOT CERTAIN
CLASSED AS AN ASSET HOWEVER IT DOES NOT FOLLOW THE TRADITIONAL RULES
In our SOFP this would be a negative asset as we would always minus it
If we want to make it bigger we credit it
CREDIT Increases Allowance for Receivables
DEBIT Decreases Allowance for Receivables
Affects my statement of financial position SOFP
Increase in Allowance for receivables
INCREASE IN ALLOWANCE
Dr Irrecoverable debt expense £ the required increase
Cr Allowance for receivables £ the required increase
Decrease in Allowance for receivables
DECREASE IN ALLOWANCE
Dr Allowance for receivables £ the required decrease
Cr Irrecoverable debt expense £ the required decrease
Final Trade Receivable Figure
TR - irrecoverable debt = then calculate the percentage of that i.e. allowance is 2% so 2% of that value which is my figure for allowance TR
- Then to get the final TR we do
TR- Allowance TR = Amount to be shown on SOFP (NET FIGURE) = this is my current asset
FINAL FORMULA
TR = TR total at year end - irrecoverable debt written off then PLUS OR MINUS Allowance for Rec
Irrecoverable debt expense formula
We will be asked to find the Irrecoverable debt expense in the statement of profit or loss. This can be quickly found with the following:
(1) Irrecoverable debts written off in period - DR
(2) Increase/(decrease) in allowance - IF INCREASE ITS A DR, if DECREASE ITS A CR (negative)
(3) Old irrecoverable debts that pay in the period - CR (negative)
This will give us the overall expense Dr (positive) or other income Cr (negative)
How do we calculate
a) Allowance Receivable
b) Trade Receivable
c) Net Trade Receivable
a) So allowance receivables = Trade Rec - Irrecoverable debt
Then we calculate the allowance from that figure
b) Trade Receivable initial figure - Written off debts
c) Net Trade Receivable = TR (AFTER WRITING OFF DEBTS) - Allowance for Rec
Accrued Income
Dr Accrued income (an asset in the SoFP)
Cr Revenue/other income (sales)
Deferred/Prepaid Income
Deferred Income = PREPAID INCOME
Dr Revenue/other income
Cr Deferred income (a liability in the SoFP)
Reverse opening accrual
Reverse opening accrual
Dr Accruals (SOFP)
Cr Expense (profit or loss)
Post closing accrual
Post closing accrual
Dr Expense (profit or loss)
Cr Accruals (SOFP)
Reverse opening prepayment
Reverse opening prepayment
Dr Expense (profit or loss)
Cr Prepayment (SOFP)
Post closing prepayment
Post closing prepayment
Dr Prepayments (SOFP)
Cr Expense (profit or loss)
Purchase of a NCA
Dr Non-current asset £ cost
Cr Cash / Trade payables £ cost
(depends how we pay - cash or credit)
NCA accumulated depreciation
For each period’s calculated depreciation charge:
Dr Depreciation expense (profit or loss)
Cr Accumulated depreciation (statement of financial position)
There is no impact on the non-current asset cost accounts, but in the final statement of financial position the balance on the accumulated depreciation account (Cr) is offset against the cost account (Dr) to derive the carrying amount (carrying value or net book value) of the non-current assets. So the cost - accumulated depreciation = Carry Amount which is the final figure in our SOFP
Depreciable Amount formula
Depreciable Amount = Cost - Residual Value
Carrying Amount/Value (CA) formula
Carrying Amount = Cost - Accumulated depreciation
This is the figure that would appear in our SOFP under our NCA
Accumulated depreciation is all the years I have had the asset. Refers to the accumulated reduction in the value of an asset over time. When an asset is first purchased, it’s typically assigned a value reflecting its expected lifespan, gradually reducing over time. Accumulated depreciation is the total of this depreciation to date.
a.g after 1 year would be price per year, after 7 years would be acc depreciation x7 and so on
straight line depreciation formula
Depreciation Charge/Expense =
Cost - Residual Value
________________________
Useful life (month or years)
It can be expressed as a % of cost (assuming no residual value) or number of years. For example:
10% OF COST straight line = 10 years (120 months) - REDUCING IT OVER 10 YEARS
25% straight line = 4 years (48 months)
20% straight line = 5 years (60 months)
5% straight line = 20 years (240 months)
100/% = No of years
100/No of years = % of cost
In your exam, straight line depreciation will normally be calculated on a monthly basis.
Reducing Balance depreciation formula
The annual depreciation charge is a fixed percentage of the brought forward carrying amount (carrying value or net book value) of the asset. It allocates a greater proportion of the cost to the asset’s earlier years, and a lower proportion in its later years and the asset becomes less useful to the business.
(Cost - Accumulated Depreciation) x % given
Carrying Amount = (Cost - Accumulated Depreciation)
Would use a pro forma table in the layout as
Carrying Amount Accumulated depreciation
Asset at cost INITIAL COST
Depreciation Year 1 INTIAL COST X % INITIAL COST x depreciation %
Carrying Amount Year 1 INITIAL COST - ACC DEP
Depreciation Year 2 CA YR 1 X % CA YR 1 x depreciation %
Carrying Amount Year 2 CA YR 1 - ACC DEP YR 2
Depreciation Year 3 CA YR 2 X % CA YR 2 x depreciation %
Carrying Amount Year 3 CA YR 2 - ACC DEP YR 3
Depreciation Year 4 CA YR 3 X % CA YR 3 x depreciation %
Carrying Amount Year 4 CA YR 3 - ACC DEP YR 4
Depreciation Year 5 CA YR 4 X % CA YR 4 x depreciation %
Carrying Amount Year 5 CA YR 4 - ACC DEP YR 5
calculate Carrying Amount in Reducing Balance depreciation
Carrying Value after n years = Cost × (1 – depreciation rate as a decimal)n
power of n is the years
change in depreciation method formula
Remaining Useful Life
What is a Fall in value (impairment loss)
Outline the PROFORMA
Sometimes an asset might suffer a permanent fall in its value (perhaps due to damage) called an impairment loss. The asset should be written down to its new carrying value, called the “recoverable amount” with the difference being expensed to the profit or loss.
To decide the recoverable amount we choose the higher figure out of the “fair value less cost to sell” (SELL) of the asset and its “value in use” (KEEP)
PROFORMA
NCA
Lower Recoverable Amount Carrying Amount Higher
Cost X Fair value less Value In Use
Acc Dep (X) cost to Sale (KEEP)
___________________ (SELL)
Carrying Amount
___________________
___________________
profit or loss on a disposal formula
PROFORMA
£
Net disposals proceeds x
(cash when sold)
Less carrying value (x)
(at disposal)
_______________
Profit/loss on disposal x/(x)
Profit would be reported in other income in SPL
Loss would be reported as an expense in SPL
What is the journal when we dispose of an asset?
SHORT CUT
DR CASH
DR ACC DEPRECIATION (clear to 0)
CR NCA COST (clear to 0)
Step 1: Remove cost of disposed asset from cost ledger
Dr Disposals account £ cost
Cr Non-current cost account £ cost
Step 2: Remove accumulated depreciation from the accumulated depreciation ledger
Dr Accumulated depreciation account £ accumulated depreciation
Cr Disposals account £ accumulated depreciation
Step 3: Account for the disposal proceeds
Dr Cash £ proceeds
Cr Disposals account £ proceeds
What is capital called for a company?
Share Capital
Share Premium
Share Capital
No of Shares x Nominal/Par/Face Value
This will be a CR
Share Premium
No of Shares x (Amount Sold - NV)
This will be a CR
Cash in relation to capital shares Formula
Cash = No of shares x Amount Sold
This will be a DR
Dividends paid during the period - equity/ordinary or irredeemable preference shares
Dr Retained earnings(capital)
Cr Cash
Dividends paid during the period - redeemable preference shares
Dr Finance charge(cost)
Cr Cash
Dividends declared before the period ends - equity/ordinary or irredeemable preference shares
Dr Retained earnings
Cr Accruals
Dividends declared before the period ends - redeemable preference shares
Dr Finance charge
Cr Accruals
Issuing Shares
Dr Cash £ issue proceeds
Cr Share capital £ nominal value of shares issued
Cr Share premium £ the balance
No of existing shares formula
Share Capital
________________
NV of 1 share
No of new shares
No of existing shares x 1/(e.g.1 for 4 so = 4)
Value of new share
No of new shares x price for 1 for (4) etc
Rights Issue Journal
Dr Cash £ issue proceeds
Cr Share capital £ nominal value of shares issued
Cr Share premium £ the balance
Bonus Issue Journal
Dr Share premium OR retained earnings £ nominal value of shares
Cr Share capital £ nominal value of shares
Accounting for non-current liabilities on issue of debt
Dr Cash
Cr Non-current liabilities
Accounting for non-current liabilities one repayment of debt
Cr Cash
Dr Non-current liabilities
Accounting for non-current liabilities interest paid
Dr Interest expense (finance cost)
Cr Cash
Accounting for non-current liabilities Outstanding interest owed
Dr Interest expense (finance cost)
Cr Accrual
Provision - Incur expenditure (increase in provision)
Dr Provision (SoFP)
Dr Expense (SPL)
Cr Cash
Create provision based on best estimate of amounts payable
Dr Expense (SPL)
Cr Provision (SoFP)
Provision - Remove excess expenditure (decrease in provision)
Dr Provision (SoFP) – to clear
Cr Expense (SPL)
Tax expense in P or L Formula
Tax expense in P or L = Directors estimated tax for the year (given in a note to the trial balance) + (under) or - (over) provision from prior year (tax figure found in the trial balance)
