Week 4 - Adjusting Entries Flashcards
Adjusting entries are
entries that are made at the end of an accounting period to adjust the accounts to accurately reflect the revenues and expenses of the current period
Accrued Expense is
expenses incurred but not yet paid
Accrued Income is
income earned but not yet paid
Prepaid Expense is
expenses paid but not yet incurred
Prepaid Income/Deferred Income is
income received but not yet earned
Each adjusting entry affects
- P&L account (a revenue or expense account)
- Balance Sheet account (an asset or liability account)
Hence Double Entry
Accrued Expenses effects:
include the accrued expense in the P&L
Show the amount of the accrual in the Balance Sheet as a Current Liability
Accrued Income effects
Include the accrued income in the P&L
Show the amount of the accrued income in the Balance Sheet as a Current Asset
Prepaid Expenses effects
Exclude the prepaid expense from the P&L
Show the amount of the prepayment in the Balance Sheet as a Current Asset
Prepaid Income/Deferred Income effects
Exclude the prepaid income from the P&L
Show the amount of the prepaid income in the Balance Sheet as a Current Liability
Depreciation is
the allocation of the cost of a fixed asset over the period in which the asset is useable in the business. The amount of depreciation refers to the loss of value that the asset suffers due to factors such as wear and tear and passage of time
Factors that effect depreciation
Cost of the asset
Expected useful life of the asset
Estimated scrap value (assuming it is material)
A forecast of the revenue to be made through use of the assets (this is used to decide the appropriate depreciation method)
Depreciation effects
The annual charge for depreciation is included in the P&L as an expense
Fixed Assets are shown in the balance sheet at cost less aggregate depreciation
Cost less aggregate depreciation is Net Book Value
Bad Debts are
the debts owing to the business which are never collected
A business that allows sales to be made on credit always runs the risk of incurring debts which are never paid
Some debtors of the company may not pay their debts due to bankruptcy, insolvency, or disputes
Bad debts become an expense of the business
Bad debts effects
Include the bad debt expense in the P&L
Reduce Debtors in the Balance Sheet
Bad Debt Provision is
an estimate of bad debts expected
charged against related Sales rather than waiting for the actual bad debts to occur in the future
Bad Debt provision effects
Include the bad debt provision as an expense in the P&L
Show as a deduction from Debtors in the Balance Sheet (please note provision is not deducted directly from Debtors balance)
