PRINCIPLES OF ACCOUNTS

FINAL ACCOUNTS WITH ADJUSTMENTS

LEARNING OBJECTIVES:

a) Steps involved in recording adjustments in the:

1. Trading &Profit & Loss a/c (Income Statement)
2. Balance Sheet (Statement of financial position)
b) How to draw up the Profit & Loss a/c and Balance Sheet with adjustments.
______________________________________________________________________________

a) STEPS IN RECORDING ADJUSTMENTS:

1. PREPAYMENTS (EXPENSES)(prepaid expenses)

• Subtract from current expense in the P&L a/c before subtracting from gross profit.
• List under current assets in the Balance Sheet

2. ACCRUALS (EXPENSES) (accrued expenses) – (owing, due, arrears, outstanding)

• Add to current expense in the P&L a/c before subtracting from gross profit
• List under current liabilities in the Balance Sheet

3. BAD DEBTS (expense)

• Subtract Bad Debts from Gross Profit in the Profit & Loss a/c
• It does not appear in the Balance Sheet

4. PROVISION FOR DOUBTFUL DEBTS

• Provision for doubtful debts expense is subtracted from Gross Profit in the P&L
a/c
• When it increases, the amount it increases by is treated the same as above.
• When it reduces, the amount it reduces by is treated as a revenue and added to
Gross profit in the P&L a/c
• Total provision is subtracted from Accounts Receivables in the Balance Sheet.

5. REVENUE OWING/ACCRUED REV (When someone maybe owing rent to you etc)
• This is added to Gross profit in the P&L a/c
• It is listed under Current Assets in the Balance Sheet AFTER accounts
receivables.

6. OTHER ITEMS
• Discount Allowed is an expense so its listed under expenses in the P&L a/c but it
does not appear in the Balance Sheet
MS. MAHABIR RSM
 • Discount Received is a revenue therefore it is added to Gross Profit in the P&L
a/c.
• Carriage outwards is an expense in the P&L a/c.

7. DEPRECIATION

• With the straight line method: cost of vehicle = $20000, 20%

Cost = $20,000 Depreciation = 20% x 20000 = 4000
2016
Less dep (4000)
NBV 16,000
2017 (this year)
Less dep (4000) P & L
NBV 12,000
Balance sheet = last yr + this yr = 4000 + 4000 = 8000

• With the Reducing Balance method: Cost of vehicle = $20000, 20%

Cost 20,000
2016
Less dep
(20 % x 20000) 4000
NBV 16,000
2017
(20% x 16000) 3200 P & L
Balance sheet = last yr + this yr = 4000 + 3200 = 7200

MS. MAHABIR RSM

 Business name
Trading & Profit & Loss account for the period ending ……………..
$ $ $
Sales xxxxx -
Less return inwards (Sales returns) (xxxx)
Net Sales xxxxx
Less Cost of Goods Sold:
Opening Inventory (Stock) xxxxx
Purchases xxxxx -
Less return outwards (Purchases returns) (xxxx) +
Net Purchases xxxxx + -
Add Carriage Inwards xxxxx xxxxx
Cost of goods available for sale xxxxx
Less closing stock (Inventory) (xxxx)
Cost of goods sold (xxxx)
GROSS PROFIT xxxxx
Add Reduction in provision in doubtful debts xxxxx
Add Receivables (revenue owing) xxxxx +
Add Revenues xxxxx
xxxxx
Less Expenses:
Wages + accrued wages xxxx
Utilities + accrued utilities xxxx
Rent – prepaid rent xxxx
Carriage outwards xxxx
Discount Allowed xxxx
Provision for doubtful debts (increase) xxxx
Bad Debts xxxx
Provision for depreciation: xxxx
Machinery xxxx
Motor vehicle xxxx
Total Expenses (xxxx)
NET PROFIT xxxx

MS. MAHABIR RSM

PAGE 271 28.8

ADJUSTMENTS:

b) Current wages = 3000

Add accrued wages 500 BS
3500 TPL

c) Current Rates = 600

Less prepaid rates (50) BS
550 TPL

d) Last year prov = 80

This year prov = 10% x 980 = 98 BS
Increase by = 98 – 80 = 18 TPL subtract from gross profit

e) Current telephone = 100

Add Accrued tel 22 BS
122 TPL

f) With the Reducing Balance method: Shop fittings = $6000, 10%

Cost 6000
last yr (2000)
4000
this yr
10% x 4000 (400) TPL

BAL sheet: 2000 + 400 = 2400

Van = $4000, 20%

Cost 4000
last yr (1000)
3000
this yr
20% x 3000 (600) TPL

BAL sheet: 1000 + 600 = 1600

MS. MAHABIR RSM

 John Brown
Income Statement for the period ending 31 Dec, 2017
$ $ $
Sales 40,000 -
Less return inwards (Sales returns) (500)
Net Sales 39,500
Less Cost of Goods Sold:
Opening Inventory (Stock) 10,000
Purchases 35,000 -
Less return outwards (Purchases returns) (620) +
Net Purchases 34,380 + -
Add Carriage Inwards 0 34,380
Cost of goods available for sale 44,380
Less closing stock (Inventory) (12,000)
Cost of goods sold (32,380)
GROSS PROFIT 7,120
Add Reduction in provision in doubtful debts 0
Add Receivables (revenue owing) 0+
Add Revenues 0
7,120
Less Expenses:
Wages (3000 + 500) 3,500
Rates (600 – 50) 550
Telephone (100 + 22) 122
Provision for doubtful debts (98 – 80) 18
Bad Debts 20
Provision for depreciation: +
Shop fittings 400
van 600
Total Expenses (5,210)
NET PROFIT 1,910

MS. MAHABIR RSM

 Name of business
Balance Sheet as at ………………………….
Cost Depreciation Net Book
$ $ Value $
FIXED ASSETS:
Premises xxxxx (xxxx) xxxx
Machinery xxxxx (xxxx) xxxx
Total Fixed Assets xxxx

CURRENT ASSETS:
Inventory (stock) xxxx
Accounts Receivable (Debtors) xxxxx -
Less Provision for doubtful debts (xxxx) xxxx
Receivables (Revenue owing, Accrued revenue) +
Prepayments xxxx
Bank xxxx
Cash xxxx +
Total Current Assets xxxx

Less Current Liabilities:

Accounts Payable/Creditors xxxx
Accrued Expenses xxxx + -
Bank Overdraft xxxx
Revenue prepaid xxxx
Total Current Liabilities (xxxx)
Working Capital xxxx
xxxx
Less Long-Term Liabilities:
Loan (xxxx)
xxxx

Financed by:
Opening Capital xxxx
Add Net Profit xxxx
xxxx
Less Drawings (xxxx)
Closing Capital xxxx

MS. MAHABIR RSM

 John Brown
Balance Sheet as at 31 Dec, 2017
Cost Depreciation Net Book
$ $ Value $
FIXED ASSETS:
Fittings 6000 (2400) 3600
Van 4000 (1600) 2400
Total Fixed Assets 6000

CURRENT ASSETS:
Inventory (stock) 12,000
Accounts Receivable (Debtors) 980 -
Less Provision for doubtful debts (98) 882
Prepayments (rates) 50
Bank 300 +
Total Current Assets 13,232

Less Current Liabilities:

Accounts Payable/Creditors 700
Accrued Expenses (500 + 22) 522 + -
Total Current Liabilities (1222)
Working Capital 12,010
18,010

Financed by:
Opening Capital 17,900
Add Net Profit 1910
19,810
Less Drawings (1800)
Closing Capital 18,010

MS. MAHABIR RSM