Year End Accounts Adjustments

Question 1

Why do we make adjustments?

Answer 1

Income and expenses are recorded when paid or billed, not necessarily for the period in which they relate. If not adjustments made, accounts will present a distorted view

Question 2

Accruals or Matching Concept

Answer 2

Income and expenses are recorded in the period to which they relate, not when received or paid.
Expense matched to period when firm had benefit of expense
Income matched to period when work producing income was done

Question 3

Prepayments

Answer 3

. Where business has paid for an expense, but does not have benefit until next accounting year eg rent
. Matching concept - DEDUCT prepayment from Expenses in P&L, ADD prepayment as a Current Asset in Balance Sheet

Question 4

Accruals

Answer 4

. Where firm has had benefit of an expense during this accounting year, but not yet paid for it
. Matching concept - ADD outstanding bill to Expenses in P&L, ADD to Current Liabilities in Balance Sheet

Question 5

WIP

Answer 5

. Matching concept - final accounts must show value of work done during year, not just what has been billed

P&L
Income
Costs 60,000
Less WIP at 1.1.20 (15,000)
Plus WIP at 31.12.20 20,000
65,000

BALANCE SHEET
Current Assets
Plus WIP at 31.12.20 20,000

Question 6

Fixed Assets: Depreciation

Answer 6

P&L shows depreciation in that particular year as an expense
Balance Sheet - shows total depreciation, to give an accurate current value of the car

P&L
Expenses
Depreciation of motor car 3,000

BALANCE SHEET
Fixed Assets
Motor car at cost 15,000
Less Depreciation:
Accumulated depreciation 3,000
This years depreciation 3,000
(6,000)

                                                              9,000

Question 7

Entity Concept

Answer 7

A business is a separate entity and accounts should only record transactions relating to the business and not cover any private dealings of a partner or proprietor

Question 8

Money measurement concept

Answer 8

Accounts measure items in cash terms, not for staff experience or amount of competition in area

Question 9

Consistency concept

Answer 9

When preparing final accounts, the firm needs to make certain assumptions eg. doubtful debt provision. The same method should be used every year so one year can be compared to another

Question 10

Prudence concept

Answer 10

We should record a possible loss in the accounts but not a possible gain. - asset values must not be overstated

Question 11

Going concern concept

Answer 11

It is assumed that the firm will continue to operate in the future

Question 12

Bad debts

Answer 12

. Prudence concept - assets should not be overvalued
. Debtors figure in Balance Sheet should reflect actual amount we expect to receive
. Adjust the accounts to reflect any further bad debts after preparing the final accounts

P&L
Expenses
Bad Debts 5000
Plus Additional Bad Debt 1000
6000
BALANCE SHEET
Current Assets
Debtors 24000
Less Additional Bad Debt (2000)
22000

Question 13

Doubtful debts

Answer 13

. Prudence concept, need to provide for likely loss of asset (debtors)
. Firm will estimate likelihood of debts becoming bad based on experience eg. 5% of debtors
. Include a Provision for Doubtful Debts in accounts

P&L
Expenses
plus Provision for bad doubtful debts 2100
(5% of £42,000)

BALANCE SHEET
Current Assets
Debtors 42000
Less: Provision for bad doubtful debts (2100)
39,900