Accounting adjustments
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Accounting Adjustments. Dr. Clive Vlieland-Boddy FCA FCCA MBA. The Trial Balance. The trial balance is a summary of the balances from the “T” accounts. It represents the totals to date.

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Accounting Adjustments

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Accounting adjustments

Accounting Adjustments

Dr. Clive Vlieland-Boddy FCA FCCA MBA


The trial balance

The Trial Balance

  • The trial balance is a summary of the balances from the “T” accounts.

  • It represents the totals to date.

  • Normally these are divided between items that will appear in the Balance Sheet and those that will appear in the Income Statement.


Balance sheet vs income statement

Balance Sheet Vs Income Statement

  • The Balance Sheet Shows what is not consumed.

  • The income statement shows what has been consumed.


Revisiting double entry book keeping

Revisiting Double Entry Book-keeping

  • Remember…. For every Credit there has to be a Debit and for every Debit there has to be a Credit.


The trial balance so far

The Trial Balance So Far

  • This will show the transactions of the enterprise up to the date of the Balance Sheet. The day the picture is taken.

  • But there will be adjustments to get this picture into correct focus.


Trial balance of abc at 31 st dec 2010

Trial Balance of ABC at 31st Dec 2010

Debit Credit

Accounts Receivable 226,000

Inventories 1st Jan 2010235,000

Bank 50,500

Accounts Payable100,700

Machinery500,000

Depreciation to 1st Jan 2010100,000

Loan125,000

Shares100,000

Retained Earnings 1st Jan 2010201,600

Sales 2,500,400

Purchases 1,456,000

Overheads 669,200

TOTAL 3,136,700 3,136,700


Adjustments

Adjustments

  • Closing Inventories

  • Bad Debts

  • Depreciation for the period/year

  • Tax for the period/year

  • Dividends

  • Sundry Accruals

  • Sundry Prepayments

  • Part of Long Term loan repayable in 12 months


Closing inventories

Closing Inventories

  • The Trial Balance will have a balance representing the opening Inventories.

  • This has to be taken out and replaced with the closing inventories.


Firstly to reverse out opening inventory

Firstly to Reverse out Opening Inventory

  • We will have to Credit the existing account with the balance and take to Cost of Goods Sold in the Income Statement

  • Credit The existing Inventory account with 235,000 and Debit Cost of Goods Sold in the Income Statement.

  • What we are saying is the opening inventories have been consumed.


Accounting adjustments

The “T” Accounts

Balance Sheet

Income Statement

235,000

235,000


Now introduce the ending inventory

Now introduce the ending inventory

  • Debit The Inventory Account in the Balance Sheet

  • Credit Cost of Goods Sold in the Income Statement as these items have not been consumed.

  • So if closing inventories were say €275,000 then…..


Accounting adjustments

The “T” Accounts

Balance Sheet

Income Statement

275,000

275,000


Bad debts

Bad Debts

  • Some Accounts Receivable may not be good. Remember an asset is only one that will bring future economic value.

  • An accounts receivable that is bad needs to be adjusted for.

  • If say €5,000 of the Accounts Receivable were uncollectable then………….


Accounting adjustments

The “T” Accounts

Balance Sheet

Income Statement

5,000

5,000

Note: That Bad Debts are actually deducted from the accounts receivable

They appear in the income statement as an overhead


The balance sheet

The Balance Sheet

Current Assets

Current Liabilities

Accounts Payable

Less: Bad Debts

Non Current Assets

Non Current Liabilities

Equity


Depreciation

Depreciation

  • Non Current Assets need to be depreciated. They lose value all the time and an adjustment has to be made.

  • Normally accounting policies will dictate the rate and method to be used.

  • The adjustment will represent a charge in the income statement as an overhead and an increase in the accumulated depreciation which is a deduction from NCA in the Balance Sheet.

  • It the charge for the year has been assessed at €85,000 then………..


Accounting adjustments

The “T” Accounts

Balance Sheet

Income Statement

85,000

85,000

Note: Depreciation is shown as a deduction from the total of Non Current Assets in the Balance Sheet.

It is an overhead in the income statement


The balance sheet1

The Balance Sheet

Current Assets

Current Liabilities

Non Current Assets

Non Current Liabilities

Plant & Equipment

Cost

Less: Accumulated Depreciation

Equity


Accounting adjustments

Tax

  • All companies have to pay tax normally based on a % of the profits.

  • This can only be calculated when the profit is established.

  • Then a provision has to be created.

  • This will appear in the Income Statement below EBIT and as a Current Liability in the Balance Sheet. (Note if part is Deferred)

  • So if the tax bill has been assessed at €85,000 then……………..


Accounting adjustments

The “T” Accounts

Balance Sheet

Income Statement

85,000

85,000

Note: if some of this tax is to be deferred then it will be split between Current Liabilities and Non Current Liabilities in the Balance Sheet.

In the Income Statement it comes after EBIT.


Dividends

Dividends

  • Only when the profit and tax is established can the company propose a dividend to the shareholders. Sadly they are always last…

  • A charge will appear after EBIT in the Income Statement and a Current Liability will be created for the dividend to be paid.

  • So if a dividend is to be paid of €70,000 then…..


Accounting adjustments

The “T” Accounts

Balance Sheet

Income Statement

70,000

70,000

Note: Dividends payable will normally be a Current Liability in the Balance Sheet.

In the Income Statement they are the last item before Net Profit Retained for the year/period.


Sundry accruals

Sundry Accruals

  • There may well be small additional liabilities that were not there when the “picture was taken”. A phone bill arriving a day or so after but for calls made in the closed period.

  • A current liability is created and a charge in the income statement under overheads is made.

  • So if there was an invoice arrived a few days into the new year for €6,000 for telephone calls all made in the closed year. Then……


Accounting adjustments

The “T” Accounts

Balance Sheet

Income Statement

6,000

6,000

Note: These will appear under Current Liabilities in the Balance Sheet.

In the Income Statement as an overhead adding to the existing costs to date for telephone.


Sundry prepayments

Sundry Prepayments

  • Some expenditures may not have been totally consumed.

  • Insurance is paid a year in advance. It is therefore totally unconsumed on the day it is paid.

  • An adjustment has to be made by creating a current asset, prepayments and reducing the charge in the income statement.

  • So if we had prepaid insurance of €3,000. Then…..


Accounting adjustments

The “T” Accounts

Balance Sheet

Income Statement

3,000

3,000


Long term loans

Long Term Loans

  • Normally these will all be shown as Non Current Liabilities as they are repayable in more than 12 months.

  • However, often a proportion is to be repaid within 12 months. This represents a Current Liability.

  • So of €15,000 of the loan is repayable within 12 months then………


Accounting adjustments

The “T” Accounts

Balance Sheet

Income Statement

15,000

-15,000

Note: Here the adjustment is to reduce Non Current Liabilities and place the amount payable within 12 months in Current Liabilities.


The balance sheet2

The Balance Sheet

Current Assets

Current Liabilities

Current Portion of Long Term Debt

Non Current Assets

Non Current Liabilities

Long Term Debt

Equity


The net income for the year

The Net Income for the Year

  • Once the income statement has been added up, there will be a profit or loss for the accounting period at the bottom.

  • This figure represents the retained earnings for the period.

  • This has to be taken to the Balance Sheet and added to the existing retained earnings.


The balance sheet3

The Balance Sheet

Current Assets

Current Liabilities

Non Current Assets

Non Current Liabilities

Equity

Retained Earnings

Add Profits Retained for Year


The double entry

The Double Entry


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