week 5

• what are BDA's?

  • They're entries made on the last day of an accounting period
  • these adjustments alter the values of A, L, I & E
  • they're heavily linked to accrual parts of accounting
• why do we need BDA's?

  • ensures information is accurate at the end of the accounting period (ie. when reports are prepared)
  • adjusting I & E: ensures an accurate performance through profit/loss in the income statement
  • adjusting A & L: ensures an accurate financial position in balance sheet
• types of BDA's

  • Accruals - cash flow hasn't occurred (adj.'s are new info)
  • Prepayments - cash flow has occurred (adj.'s are existing info)
• reminder

  • L + C + I = A + D + E
• Accrual - income (eg. sales on credit)

  • when income has been earned but the cash has not been received
  • general journal: inc A.R + inc income
  • adjustments record new information
  • other accrued incomes: interest receivable
• Accrual - expense

  • when an expense has incurred but the cash has not been paid.
  • 2 fold effect: increase liability, increase expense
  • adjustments record new information
  • eg. wages, interest, electricity
• prepayments - income

  • Prepaid income adjustments alter EXISTING data in the accounting records.
  • The cash receipt has ALREADY been recorded but you must pay attention to HOW it was recorded:
  • If initially recorded as a LIABILITY, adjust for the amount EARNED.
  • If initially recorded as INCOME, adjust for the amount NOT EARNED.
• Depreciation (1)

  • NCA's (except land) have limited amounts of economic benefits that are consumed over several years.
  • they cannot be recorded as assets and have the same value
  • thus, depreciation adjustments are needed to show that the economic benefits of the assets are consumed, shown by depreciation expense and reduction in assets value
• prepayments - expense

  • Prepaid expense adjustments alter EXISTING data
  • The cash payment has already been recorded but you must pay attention to HOW it was recorded:
  • If initially recorded as an ASSET, adjust for the amount USED.
  • If initially recorded as an EXPENSE, adjust for the amount NOT USED
• Depreciation methods

  1. straight line
  2. reducing balance
  3. unit of production
• Depreciation (2)

  • Depreciation – the allocation of the depreciable amount of an asset over its useful life.
  • Useful life – the period over which an asset is expected to be available for use.
  • Residual value – the ESTIMATED amount that an entity would currently obtain from disposal of the asset…at the end of its useful life.
  • Depreciable amount – the cost of an asset less its residual value.
  • Carrying amount – the amount at which an asset is recognised after deducting accumulated depreciation
• straight line method formula

  • it allocates an equal amount each period of the asset's life

  A) residual value

  B) useful life

  
• Doubtful debts (1)

  • whenever something is sold on credit, there is risk that the customer won't pay
  • A doubtful debt is one that MAY NOT be collectible.
  • A bad debt is one that is WRITTEN OFF as uncollectible.
• why do we record doubtful debts

  • to provide an accurate representation of expenses and assets
• 2 methods of accounting for bad and doubtful debts

  1. direct write-off method
  2. allowance method
• direct write-off method

  • it's in the name, straightforward
  • No allowance is made
  • The Bad Debts Expense is recognised only when an account is considered uncollectible.
  • entry: increase bad debts expense, decrease A.R asset
• The allowance method

  • Allows for a proportion of Accounts Receivable to be considered doubtful in the same accounting period that the RELATED income was earned
  • this proportion is an ESTIMATE
• The allowance method (2)

  • when the customer becomes a bad debt, NO new expense is recorded (already allowed for)
  • entry: Decrease AFDD (-A), decrease AR (A)
• ways of estimating the allowance

  1. Based on a % Credit Sales/Service income
  2. Based on a % of Accounts Receivable