13:Adjustments

• Adjustment of the income statement items at the end of a financial year period is necessary to comply with the accrual basis. the adjustments to the ledger accounts are done in the form of adjustment journals

  • adjustment journals are recorded in the general journal then posted to general ledger
• Bad debts written-off

  • specific debtors that are written off as proof exists that the debtors in all probability will not be able to pay their debts
• Unable to pay debts= written off as bad debt

  • therefore adjustment will have to be made in the debtors' ledger
  • amount will be taken out of the debtor system completely
• Write off bad debt:

  Dr Bad Debts

  Cr Debtors

  • written off in income statement, debtors will decreases
  • debtors control account and debtors ledger will decrease
• bad debts recouped/recovered

  • debts written off as bad debts in the current year,collected in same year
  • debts written off as bad debts in previous year,collected in current year
• bad debts written off CY,collected in CY

  DR Bank

  Cr Bad debts
• bad debts written off PY, collected in CY

  Dr Bank

  Cr bad debts recovered(income)
• ACLD: Allowance for credit losses of debtors

  • offset against debtors' control on B/S
  • CONTRA is always "Movement in ACLD"
  • "negative asset" increase CR, DR side
• Allowance for credit losses of debtors at the beginning of year must be reversed as follows, before the allowance for credit losses of debtors for current year is recognised:

  Dr ACLD

  Cr movement in ACLD
• The allowance for credit losses of debtors at the end of the year:

  Dr Movement in ACLD

  Cr ACLD
• The net movement in allowance for credit losses of debtors is an increase(debit) and will be recognised as an expense in the income statement. The total of the allowance for credit losses of debtors will be netted off against the debtors for disclosure purposes.
• An accrued expense is an expense that is applicable to a specific financial period, but has not been paid at year-end. Although the expense will be paid in the next financial period, it accured in the current period and must be recognised in the current period together with a current liability
• A prepaid expense is an expense that is paid in the current financial period, but is applicable to future financial period. Only portion of the expense applicable to current period must be recognised in the current period. the portion of the expense applicable to a future period must be reclassified as a current asset at year-end.
• Income receivable/accrued income is an income applicable to a specific financial period but one that has not been received at year-end, the income is thus accrued. Although the income will be received in the next financial period, it accrued in the current period and must be recognised in the current period together with current asset.
• Income received in advance is income received in the current financial period, but is applicable to a future financial period. Only the portion of the income applicable to the current period must be recognised in the current period. The portion of the income applicable to a future period must be reclassified as a current liability at year-end.
• Consumable inventory on hand

  • it is possible that some consumable inventory was unused at year-end and that it will be used in a future period. The portion of the expense regarding consumable inventory that will be used in the future period must be reclassified as consumable inventory at year-end
• Suspense accounts

  • transactions recorded where accountant unsure about the correct classification of one of the elements (Income,expense,asset or liability)
  • Temporarily post the element of the transaction to a suspense account until it can be classified
  • use of it must be avoided if possible and the account must be closed-off at year end
• Income statement

  
  

  Sales

  Cost of sales

  -Gross Profit

  
  

  +Other Income

  
  

  -Other Expenses

  
  

  = Profit/loss for the year
• Balance Sheet:

  Assets

  -non-current

  -current

  
  

  Equity and Liabilities

  Capital

  Opening balance

  Profit/Loss for the year

  -Withdrawals

  +capital contributions

  
  

  Liabilities

  -current

  -non-current