Semester 1 Week 2 PP (The ETB, Accounts Preparation) Flashcards
What is Accrued Income?
Accrued income is income earned, but not received it is a current asset.
What is Deferred Income?
Deferred income is income received not earned, it is a current liability.
Preston has £1,000 on deposit in a bank account, earning 5% per year. The money has been on deposit all year
Preston has a December year end and the interest is received one month after the year end.
Prepare any adjustment required for the interest and journal(s).
Although the money is received post year end it has been earned throughout the current year and should therefore be recognised as income.
5% x £1,000 = £50
Dr P/L interest income £50
Cr Accrued income £50
Being interest earned
Hendrik Ltd. (‘Hendrik’) operates as a building contractor with a December year end.
In November 20X5 they accepted a job for the rebuilding of a barn and wall, receiving a deposit of £3,000 at the same time. This deposit was recorded as a sale.
Due to bad weather the work did not commence until late January 20X6.
Prepare any year end adjustment required for the sales income and journal(s).
Although the £3,000 has been received this year, no work has been done so it should not be recognised as income. It has not been earned.
Dr Sales £3,000
Cr Deferred income £3,000
Being income deferred
The accruals principle also states that income should be matched against the expenses incurred to generate it.
For example a business buys 50 pairs of trainers one year at £20 each. During the year 40 are sold at £35 each.
Is the profit:
(40 x £35) – (50 x £20) = £400
Or
(40 x £35) – (40 x £20) = £600
The profit is £600, 10 pairs of trainers have not been sold and remain. They will be sold next year and should therefore have their expenses recognised next year (to match the income they generate). At the year end they will be recognised as stock – an asset, as this will generate benefits in the future.
The cost of sales in any given year is therefore =
Opening stock (goods bought last year but sold this year) +
Purchases (goods bought in the year) –
Closing stock (goods still held at year end)
Thomas Ltd (‘Thomas’) has opening stock of £13,000. During the year they purchased goods for £235,000. A year end stock count found £15,000 of goods still held at the year end.
Calculate cost of sales and prepare the appropriate journals .
Cost of sales = £13,000 + £235,000 - £15,000 = £233,000
Dr COS £13,000
Cr Stock £13,000
Being transfer of opening stock
Dr COS £235,000
Cr Purchases £235,000
Being transfer of purchases
Dr Stock £15,000
Cr COS £15,000
Being transfer of closing stock
What is the Prudence principle?
The prudence principle means we shouldn’t recognise profits until we are sure they are earned but we should recognise losses (or potential losses) when we have risk.
For example, we should write off debtors we do not expect to receive and provide for ones we are concerned about.
What is the difference between a bad debt write off and a bad debt provision?
A write off is where we do not expect to receive a debt – this removes the debtor.
A provision is where we have concerns over the debt, a provision sets separately from the debtor but the two are netted off against each other on the balance sheet.
A provision can be specific (specific debt we are worried about) or general (know from past experiences that some debtors might not pay).
At the year end Young Ltd. (‘Young’) has total debtors of £42,000.
This includes a balance of £2,000 from James, James has gone bankrupt and is unable to pay. The directors decide to write this off.
Anna owes £5,000, and is late in paying, the directors have heard no more from Anna and decide to write this off in full. The directors consider a 2% general provision of all remaining debtors to be appropriate.
Prepare the appropriate journals to account for this.
NB: There is no brought forward provision.
Write off bad debt
Dr P/L bad debt expense £2,000
Cr Debtors £2,000
Being write off of debt
Specific provision = £5,000
General provision = 2% x (£42,000 - £2,000 - £5,000) = £700
Total provision = £5,700
Dr P/L bad debt expense £5,700
Cr Provision for doubtful debts £5,700
Being debtors provision
What value should we take for stock?
Stock should be held at the lower of cost (how much we paid for it) and net realisable value (NRV), (how much it will actually sell for).
This may mean it is necessary to write off/write down stock if it will be sold for less than cost. Or a provision if we are worried it will.
At the year end Webber holds stock with a cost of £10,800. This includes books which were purchased for £900, the books have been destroyed in a flood and are no longer sellable.
It also includes computer equipment which was purchased for £1,200. Webber is concerned it will now only sell for £1,080 less selling costs of £80.
Prepare the appropriate journals to account for these.
Write off damaged stock
Dr P/L COS £900
Cr Stock £900
Being write off of stock
NRV= £1,080 - £80 = £1,000
Provision required = £1,200 - £1,000 = £200
Dr P/L COS £200
Cr Stock provision £200
Being stock provision
How and Where do we post adjustments such as depreciation, accruals etc?
The Extended Trial Balance (ETB) using a column normal titled “Adjustments”.
The furthest left column is the trial balance from the client’s books and records (a normal Trial balance). The centre columns show the adjustments put through – note there are columns to show what journal put through the adjustment. These are added together to give the furthest right “final” column.
All have 2 sets of columns, one for DR and one for CR.
