Key Flashcards
1
Q
Environmental liabilities or decommissioning costs (2 and effect)
A
- Environmental liability: If entity is obliged, legally or constructively to carry out restorative work or rectify environmental damage then a provision is recognised
-
Decommissioning cost: often relate to non-current assets e.g. power stations.
Added to cost of non-current asset as follows:
2
Q
Construction contracts – question approach to calculate financial statement figures
4 steps?
A
- Calculate expected contract outcome = contract price - total costs
- Calculate profit or loss = percentage completion = (costs incurred to date/total costs) x Revenue - Costs to date = profit
- Calculate work in progress (contract asset = costs to date + profit/ - loss recognised - amounts invoiced)
- Calculate amount receivable = amounts billed to date - amounts receivable
3
Q
Contingent liabilities (7)
Should be disclosed when one or more requirements for a provision are not met (3)
Treatment (3)
A
A contingent liability should be disclosed when one or more of the requirements for a provision are not met:
- A possible obligation exists, and/or
- An outflow of economic benefits is not probable, and/or
- The amount cannot be measured with sufficient reliability
- Not to be recognised in Statement of Financial Position - Only to be disclosed unless possibility of transfer is remote - Disclosure to include nature of contingency uncertainties expected to affect final outcome estimate of (potential) financial effect
4
Q
Revaluation model (3)
What is fair value?
Why do revaluations need to be performed regularly? (2)
If an asset is revalued…?
3 steps
A
Revalued amount: fair value
- The amount for which an asset could be exchanged between knowledgeable and willing parties in an arm’s length transaction.
Revaluations need to be performed regularly:
- To ensure validity
- Depends on movement in fair values
If an asset is revalued, the entire related class of assets must be revalued
- Restate asset at revalued amount
- Remove accumulated depreciation on the asset
- Credit the revaluation reserve
5
Q
Asset cost
What are directly attributable costs according to IAS16 (5)
A
Directly attributable costs (IAS 16):
- Site preparation
- Delivery and handling costs
- Installation costs
- Professional fees
- Commissioning costs
Extra
- Self-constructed assets
- Subsequent expenditure
In any given scenario, work through the list of costs to determine which can be capitalised
6
Q
Recognition test
A liability is recognised in the SOFP when:(2)
What if it doesn’t
A
- It is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation; and
- The amount at which the settlement will take place can be measured reliably
Non-recognition: Liabilities that pass definition test but fail recognition test
7
Q
Recognition of PPE
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (2)
A
a. It is probable that future economic benefits associated with the item will flow to the entity;
and
b. The cost of the item can be measured reliably
8
Q
Distribution costs (6)
A
Includes:
- salaries etc. of marketing/distribution staff
- Sales commission
- (Distribution) vehicle running costs & carriage outwards
- Depreciation of Non-current assets (NCA) used by distribution operations
- Losses on the disposal of NCA used by distribution operations
- Advertising & selling activities
9
Q
Investment ratio’s - their formulas and use? (5)
Capital Gearing
Divident Cover
Interest Cover
Earnings per Share
Price Earnings Ratio
A
Capital Gearing
- (𝑳𝒐𝒏𝒈 𝒕𝒆𝒓𝒎 𝒍𝒐𝒂𝒏𝒔)/(𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅)
- Gearing or leverage is relationship between fixed interest capital (debt) and total capital (debt and equity).
- Measure of financial risk
Dividend Cover
- (𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙)/(𝑬𝒒𝒖𝒊𝒕𝒚 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅)
- Measure of ability of company to pay current dividend
Interest Cover
- (𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕)/(𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒄𝒐𝒔𝒕)
- Measure of ability of company to pay current interest
Earnings per share
- (𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙)/(𝑵𝒐. 𝒐𝒇 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔)
- Useful for shareholders to evaluate performance over time
Price Earnings Ratio
- (𝑴𝒂𝒓𝒌𝒆𝒕 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆)/𝑬𝑷𝑺
- Reflects risk – effectively number of years taken to cover the cost of buying a share
10
Q
Performance ratios - their formulas and use? (5)
Gross Profit
Operating profit margin
Return on Capital Employed
Asset turnover
Non current asset turnover
A
Gross profit
- (𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕)/𝑹𝒆𝒗𝒆𝒏𝒖𝒆 x 100%
- Effectively shows the percentage of revenue that’s generated from the main trade of the organisation.
Very industry specific.
Operating profit margin
- (𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕)/𝑹𝒆𝒗𝒆𝒏𝒖𝒆 x 100%
- Shows a measure of profit that is generated per £1 of revenue that can contribute towards tax and finance costs. Very industry specific.
Return on capital employed (‘ROCE’)
- (𝑷𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒕𝒂𝒙 𝒂𝒏𝒅 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕)/(𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔 𝒍𝒆𝒔𝒔 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)
=
- (𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕)/(𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅) x 100%
- Indicates how efficiently and effectively a company has utilised its assets during a period in generating profit
Asset turnover
- 𝑹𝒆𝒗𝒆𝒏𝒖𝒆/(𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅)
- Expressed as a number of times per annum
- Effectively shows the sales revenue generated for every £1 of capital employed.
- Measure of the level of activity and productivity.
Non current asset turnover
- 𝑹𝒆𝒗𝒆𝒏𝒖𝒆/(𝑵𝒐𝒏 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔)
- Expressed as a number of times per annum
- Effectively shows the sales revenue generated for every £1 of non current asset.
- Measure of the level of activity and productivity.
11
Q
Recognition of a provision – three criteria approach
A
“A provision shall be recognised when:
1. an entity has a present obligation (legal or constructive) as a result of a past event; (Obligating event – no alternative to settling the obligation)
2. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation;(More likely than not (> 50%))
and
3. a reliable estimate can be made of the amount of the obligation.” (Best estimate – amount that would be rationally paid to a 3rd party)
12
Q
Restructuring Provisions (3)
A
- A constructive obligation arises only when an entity has a detailed formal plan for the restructuring
- Has raised a valid expectation that it will carry it out by starting to implement it or announcing its main features to those affected by it
- Should only include costs directly arising from the restructuring
expenses
13
Q
What happens if a previously impaired asset’s market value increases
A
- If a previously impaired asset’s market value increases
- Previous impairment reversed, up to values previously written-off, to SOPL
- Balance (if any) to revaluation reserve
14
Q
What happens with a downwards revaluation? (3 things)
A
- Decrease in market value
- Written-off against revaluation reserve up to the value of its balance
- Remainder to the SOPL as an impairment
15
Q
Contingent assets
When to recognise an asset?
When not to, and what to do? (2)
Disclosed if?
What should the disclosure include (3)
A
A contingent asset is a possible asset that arises from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of the entity
- Recognise only if virtually certain (no longer contingent)
- If economic benefits are probable – disclose in a note
- If less than probable – no disclosure
- Not to be recognised in Statement of Financial Position
- Only to be disclosed where inflow of economic benefits is probable
Disclosure to include:
- nature of contingency
- uncertainties expected to affect final outcome
- estimate of (potential) financial effect
16
Q
Administrative expenses (6)
A
Includes:
- Salaries etc. of admin staff
- Depreciation of NCA used by non-production operations
- Losses on the disposal of NCA used by non-production operations
- Amortisation of intangible assets
- Cash discounts to customers
- Irrecoverable debts
17
Q
Financial position/ liquidity - their formulas and use? (6)
Inventory turnover
Inventory days
Receivables days
Payables days
Current Ratio
Quick Ratio
A
Inventory turnover
- (𝑪𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔)/(𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚)
- How many times inventory is turned over in a year
Inventory days
- (𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚)/(𝑪𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔) 𝑿 𝟑𝟔𝟓
- How long on average inventory is stored before it is sold
Receivables’ days
- (𝑻𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔)/(𝑪𝒓𝒆𝒅𝒊𝒕 𝒔𝒂𝒍𝒆𝒔) 𝒙 𝟑𝟔𝟓
- How long it takes on average to collect receivables
Payables’ days
- (𝑻𝒓𝒂𝒅𝒆 𝒑𝒂𝒚𝒂𝒃𝒍𝒆𝒔)/(𝑪𝒓𝒆𝒅𝒊𝒕 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔) 𝒙 𝟑𝟔𝟓
- How long it takes on average to pay payables
Current ratio
- (𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔)/(𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)
- Measure of extent current liabilities are covered by current assets
Quick ratio
- (𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 𝒍𝒆𝒔𝒔 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚)/(𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)
- Measure of ability to cover liabilities with most liquid current assets
18
Q
Recognition – general
Recognise only if: (2)
What does IAS 38 specifically exclude? (4)
A
Recognise only if:
- It is probable future economic benefits are expected to flow AND
- Cost can be measured reliably (like a trademark, can be very subjective in auditing)
IAS 38 specifically excludes internally generated brands, mastheads, publishing titles, customer lists
19
Q
Cost of sales
Equation?
Includes (3 +3)
A
Opening inventory + purchases - closing inventory (O+P-C)
- Salaries of production staff
- Substantial inventory losses
- Charges relating to production of non-current assets
- Maintenance - Depreciation - Loss on disposal
20
Q
Transfer of excess depreciation (3)
A
- A revaluation gain will lead to a higher depreciation charge in the IS
- IAS 16 allows for the ‘excess depreciation’ to be transferred between reserves.
- So it doesn’t affect profit
Note: it does not change the depreciation charge in the SOCI
Dr Revaluation Reserve
Cr Retained Earnings
21
Q
Internally generated intangible assets: some costs may be capitalised
What are the 2 phases
Examples?
Criteria (6)?
A
Research phase
- E.g. Obtaining knowledge, search for, evaluation and selection of applications for knowledge
- ALL costs should be recognised as expenses when they occur
Development phase
- E.g. Design re new tech, prototypes, alternatives etc
- If specific criteria met => MUST capitalise
Strict criteria that must be satisfied
- Completing to stage or use of sale is technically feasible
- There is an intention to complete
- There is an ability to use or sell
- Able to demonstrate that probable future economic benefits exist – commercially viable
- Adequate technical, financial and other resources available to complete
- Attributable expenditure can be reliably measured
22
Q
Types of share issue (recap)
A
Standard/ at a premium:
Dr cash, Cr share capital/ share premium
Rights issue:
Dr cash, Cr share capital/ share premium
but work out how many shares would be issued and split between share capital/ share premium
Bonus issue:
Dr share premium (use first), Dr retained earnings (if share premium used up), Cr share capital
rights = owners pay for more
bonus = free for owners
23
Q
Valuation of inventories
Net Realisable value is?
Adjustment to COS expense for (3)?
Journal entry?
A
Net Realisable Value:
- Estimated selling price less
- Estimated costs of completion and estimated costs to make the sale
Adjustment to Cost of Sales expense for:
- Carrying value of inventories sold
- Amount of write down of inventories to NRV
- Amount of any losses of inventories
Journal entry:
- Dr expense
- Cr inventory
Write down of inventories
24
Q
Cost of inventory is defined by IAS 2 Inventories as:
Examples (9)
A
Cost of inventory is defined by IAS 2 Inventories as:
“Comprising all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.”
- Purchase price, import duties and other taxes, transport costs to the current location
- Deduct trade discounts, rebates and subsidies
- Manufacturing – direct materials, direct labour and appropriate overhead
25
IAS 2 Inventories
Disclosure Requirements: (7)
* **Accounting** **policy** adopted in measuring inventories
* Total **inventory**, analysed into **categories**
* Amount of inventory **carried** at **NRV**
* Amount of **inventory** recognized as an **expense** in period (**cost** **of** **sales**)
* Amount of any inventory **write**-**down**
* Carrying amount of **inventory** pledged as **security** for **liabilities**
* Amount of any **reversal** of **inventory** **write-down**
26
IFRS 15 Exclusions from revenue (3)
Exclusions from revenue:
- Borrowings – they increase borrowings, not equity
- Shareholder contributions e.g. share issues
- Gains on disposal of assets or revaluations
27
When is revenue recognised?
A five-step process must be followed per IFRS 5:
A five-step process must be followed per IFRS 5:
1. **Identify** a **contract** with a customer
1. **Identify** the **performance obligations** in the contract
1. **Determine** the **transaction price**
1. **Allocate** the **transaction price** to the performance obligations in the **contract**
1. **Recognise** revenue when (or as) the entity satisfies a **performance obligation**
28
IFRS 15 Treatment of construction contracts
Recognise revenue when control passes
2 ways to determine the amount of revenue earned:
Recognise revenue when control passes
2 ways to determine the amount of revenue earned:
_Output method_
- E.g. **surveys** of **work completed** or **units delivered**
- *The contract can be split into a number of **separate** **components**, and **revenue** is **recognised** based on the agreed **price** for **each** **component** **completed**.*
_Input method_
- Revenue measured based on **inputs** to **date** e.g. **costs incurred** **relative** to **total required** to complete
- *The measurement of progress made on a contract is based on the **cost of the work certified** as a **percentage** of the **total estimated cost** of the contract.*
29
Required disclosures for construction contracts
- Disclose information to **_________ _________** to assess the **_________ _____ __________** likely to be **_______________** with **__________** **___________**
- Includes **____________** relating to **___________**, **_______________** **__________**, **_________** of **_____________** **__________** and **_____________** and **___________** **______________**
- **_______________** **______________** must also be explained
Required disclosures
- Disclose information to **allow users** to assess the **risks and rewards** likely to be **associated** with **ongoing** **contracts**
- Includes **amounts** relating to **revenue**, **impairment** **losses**, **value** of **contract** **assets** and **liabilities** and **descriptive** **information**
- **Significant** **judgements** must also be explained
30
Construction contracts – question approach to calculate financial statement figures
4 steps?
1. Calculate expected contract outcome = **contract price - total costs**
1. Calculate profit or loss = percentage completion = **(costs incurred to date/total costs) x Revenue - Costs to date = profit**
1. Calculate work in progress (contract asset = **costs to date + profit/ - loss recognised - amounts invoiced)**
1. Calculate amount receivable = **amounts billed to date - amounts receivable**
31
What is a financial instrument?
Which accounting standard is it and how is it defined?
3 parts and examples of them?
Defined in **IAS 32** Financial Instruments: Presentation as:
Any **contract** that gives **rise** to a **financial asset of one entity** and a **financial liability** or **equity** **instrument** of **another**
_Financial asset of one entity_
- e.g. cash,
- equity instrument of another entity or contractual right to receive cash or other financial asset
- (NOT physical assets, prepayments, warranty obligations)
_Financial liability_
- e.g. contractual obligation to deliver cash/financial asset
- or entity’s own equity instruments
_Equity instrument_
- Provides **residual interest** in the **assets** of an **entity** after **deducting all liabilities**
- **Ordinary shares** are the **most common**
Therefore - **two parties**, to be **recognised** as an **asset** by one party and either a **liability** or **equity** by the other
32
IAS 32 Financial Instruments: Presentation
Classify at time of issue according to the substance of the contract as follows: (3)
Offsetting (netting) financial assets and financial liabilities is only permitted if: (2)
Classify at time of issue according to the substance of the contract as follows:
_Asset_
- If contractual obligation to **receive** cash or another financial asset
_Equity_
- If **no obligation** to transfer economic benefit
_Liability_
- If contractual obligation to **deliver** cash or another financial asset
_Offsetting (netting) financial assets and financial liabilities is only permitted if:_
- There is a **legally enforceable right** to **set off** the recognised amounts **and**
- The entity intends to **settle** on a **net** **basis**, or to **realise** the **asset** and **settle** the **liability** **simultaneously**.
33
Preference Shares
Redeemable (1) vs Irredeemable (2)
In line with ‘substance over form’…
_Redeemable_
- **Usually** treated as a **liability** in substance as **contractual** **obligation** to pay **dividends** and **repay** the **capital**
_Irredeemable_
- If dividends are **mandatory** and **cumulative**, then **contractual** **obligation** to **deliver** **cash** or other financial asset – **liability**
- If dividends are **discretionary** then **no** **contractual** **obligation** – **equity**
| If redeemable = classify as a liability
34
Treasury shares
What are they?
Accounting treatment (4)
Equity instruments that are reacquired by the company i.e. share buyback
_Accounting treatment:_
- Deduct from equity (separate reserve)
- Do not recognise gains/losses on purchase, sale, issue or cancellation
- Consideration paid or received should be recognised in equity
- Amount of treasury shares held disclosed in SoFP or notes
| Dr Treasury Shares
Cr Cash
35
Issue costs example
36
IFRS 7 Disclosures - Financial Instruments
Disclosures are required to enable users to evaluate: (2)
Disclosures are required to enable users to evaluate:
- The **significance** of financial instruments for the entity’s **financial** **position** and **performance**, and
- The **nature** and **extent** of **risks** arising from financial instruments to which the entity is **exposed**, and how the **entity** manages those **risks**
37
The 5 main BOPE
- Sales Day Book (SDB)
- Record credit sales and returned sales
- Purchase Day Book (PDB)
- Record credit purchases and returns
- Cash Book (CB)
- Recording bank receipts and payments
- Petty Cash Book (PCB)
- Record petty cash transactions
- Journal Book (JB)
- Record unusual and period end adjustments
38
Returns inwards vs Returns outwards
Return inwards:
- Sales returns
- Goods that customers return to the seller
Debit: Sales Returns/Returns inwards
Credit: Account Receivable/Cash
Return outwards:
- Purchase returns
- Goods that a company returns to its supplier
Debit: Accounts Payable/Cash
Credit: Inventory or Purchases
39
Tax
A company is a...
What is tax therefore?
As tax liability is finalised after the year end...?
Double entry for this?
Any under/over provisions are...
During year....
- A company is a separate legal entity and is liable to pay corporation tax on its profits
- Tax is therefore another expense in the Income Statement
- As the tax liability is finalised after the year end, estimated tax liabilities are calculated and included within current liabilities
- Dr tax charge (IS), Cr tax payable (SOFP) with estimated liability
- Any under/over provisions are corrected in the following year
- During year, record tax paid and record year end estimated liability
40
Tax - 2 methods?
Method 1:
1.Post tax paid in year to the tax liability and adjust for any under or over provision in the previous year
2.
**over provision:**
Dr tax payable Cr Tax charge/expense
**under provision:**
Dr tax charge/expense Cr tax payable
Method 2:
1. Clear the opening tax liability to the tax charge/expense account
Dr tax liability Cr tax charge/expense
2. Post tax paid to the tax charge/expense account
Dr tax charge/expense Cr Bank
3. Post estimated year end liability
Dr tax charge/expense Cr tax liability
don’t have to calculate the under or over provision as it automatically comes through in the tax charge account
41
Tax Example (4 double entries)
Estimated tax liability in y1 to be £25,000 as at 31 March 22 but paid no tax in that year. During the year end 31 March 23 they paid the tax liability of £22,000 for the year ended 31 March 22. The company estimates its tax liability for year end 31 March 22 as £30,000
· **y/e 31 March 2022**
Dr tax charge IS £25,000
Cr tax payable SOFP £25,000
*Being estimated tax liability for ye 31.3.22*
**y/e 31 March 2023**
Dr tax payable SOFP £22,000
Cr Bank £22,000
*Being tax paid in the year*
Dr tax payable SOFP £3,000
Cr tax charge IS £3,000
*Being over provision y/e 2022*
Dr Tax charge IS £30,000
Cr tax payable (SOFP) £30,000
*Being estimated tax liability for ye 31.3.23*
42
Typical classification of expenses
Cost of sales
Distribution costs
Administration expenses
Finance costs
Cost of sales:
- Opening inventory (raw materials, - WIP, finished goods)
- Carriage inwards
- Purchases
- Manufacturing expenses
- Closing inventory (raw materials, WIP, finished goods)
Distribution costs:
- Advertising
- Carriage outwards
- Delivery vehicle expenses
- Expenses relating to warehousing of finished goods ready to be sold
- Selling costs
Administration expenses
- Auditor fees
- Irrecoverable receivables
- Discount received
- Directors remuneration
- Office costs
Finance costs:
- Bank overdraft/loan interest
- Debenture interest
- Loan stock interest
- Redeemable preference share dividends
- Discount allowed
43
Key Points
Errors in the trial balance must be identified and corrected
- Adjustments are needed to comply with the IASB and UK company law
- Key accounting conventions
- Matching, going concern
- Accrual
- Increase the expenses in IS and recognise the liability in the BS
- Dr Expense (IS), Cr Accruals (liability in BS)
- Prepayment
- Decrease the expenses in IS and recognise the asset in the BS
- Dr Prepayment (Asset in BS), Cr Expense (IS)
44
Doubtful Debts
- The accountant is being ______ in recognising the risk of ___-_______ and makes a charge to the __and some _________ to the value of ___________ in the __
- The adjustment may be against a _______ ________, or may be in the form of a _______ _________ set a percentage of total receivables
What would the Journal Entry look like?
Normally the same expense account is used as for bad debts in the IS, but separate accounts could be used
- The accountant is being prudent in recognising the risk of non-payment and makes a charge to the IS and some reduction to the value of receivables in the BS
- The adjustment may be against a specific debtor, or may be in the form of a general provision set a percentage of total receivables
Journal Entry
Dr Bad Debt expense (IS) 100
Cr Provision for Doubtful Debts (BS) 100
45
Introduction to sales and receivables
- Sales are either __ ______ or for ____________ __________
- Receivables arise when a business makes a _______ sale
What are the two effects of a sale?
What are the two effects upon settlement?
- Sales are either on credit or for immediate payment
- Receivables arise when a business makes a credit sale
Sale:
Dr Receivables 300
Cr Sales 300
Upon settlement: (payment by debtor/receivable)
Dr Cash/Bank 300
Cr Receivable 300
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Example – journal entries
Extract from the Trial Balance as at 31 October 2023
Cr£
Prov. for doubtful debts 1,500
Dr£
Receivables 75,000
Electric 2,200
Insurance 3,000
The following adjustments are to be made:
- A receivable of £2,500 has to be written off, and the general provision is to be adjusted to 3% of receivables.
- The last electric bill paid was for £600 and covered the three months to 30th September 2023
- The last insurance bill paid in the year was for £1,800 and covered the 12 months to 31st March 2024.
Write out the journal entries for the above
Prepare IS and BS extracts
1. Write off of Bad Debt
Dr
Cr
Being the write off of the bad debt
2. Calculation of general provision:
£75,000 - £2,500 = £72,500
£72,500 @ 3% = £2,175
£2,175 is the final provision needed. Already have £1,500 provision so increase by £675
Dr
Cr
Being the increase in the general provision
3. Electric Accrual
Dr
Cr
Being the accrual for Oct 23 (£600 x 1/3)
4. Insurance Prepayment:
Paid 12m to 31 March 2024
Prepaid Nov, Dec, Jan, Feb, Mar
Prepayment = £1,800 x 5/12 = £750
Dr
Cr
Being the prepayment for Nov - March
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Extract from the Income Statement
Expenses
Bad Debt Expense (2,500 + 675) 3,175
Electric (2,200 + 200) 2,400
Insurance (3,000 – 750) 2,250
2,500 + 675
Extract from the Balance Sheet
_Current Assets_
Receivables 72,500 (75,000
– 2,500)
Less provision (2,175)
70,325
Prepayments 750
_Current Liabilities_
Accruals 200
48
To spread the decline in value we might take the total cost of £20,000 and spread over the five years. Ie the value of the tractor in the balance sheet will reduce by £4,000 each year
Opening BS value **Depreciation taken to IS** Closing BS value
Year 1 £20,000 **£4,000** £16,000
Year 2 £16,000 **£4,000** £12,000
Year 3 £12,000 **£4,000** £8,000
Year 4 £8,000 **£4,000** £4,000
Year 5 £4,000 **£4,000** £NIL
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Depreciation: Double Entry (what are the 2 effects)
What do we not do?
Dr Depreciation Charge (IS)
Cr Accumulated Depreciation (BS)
n.b we do NOT credit the non current asset directly
50
Accounting for VAT
- The double entry for a credit sale of 1000 plus VAT?
- The double entry for a purchase on credit of 600 plus VAT?
Dr Receivables 1200
Cr Sales = 1000
Cr VAT = 200 (liability to pay to HMRC)
Dr Purchases = 600
Cr Payables = 600
Cr VAT = 120 (asset as HMRC owe you)
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An example of an onerous contract
