Friday, 10 August 2012

Process the Following Adjustments: Accruals, Prepayments, Deprecation and Bad Debts


What is an accrual?
This is adding together certain items related to the business that will have to be paid out or received after a period of time. There are two types of accruals. Accrued expense and accrued revenue. Accrued revenue is an asset, while an accrued expense is a liability.

Where are they put into the accounts?
They are but into the income statement as an expense and a balance sheet as a current liability.


What is a prepayment?
They are expenses that have been paid in advance but have not received the benefits of the expense. They are seen as a current asset.

Where are they put into the accounts?
They are but into the income statement as an income and a balance sheet as a current asset.

Click on this link to learn more about accruals and prepayments:


What is deprecation?
To see a definition of depreciation check out the page on deprecation

Where do you put it in the accounts?
It is put into the income statement as an expense and in the capital assets in the balance sheet. When deprecation is added together year after year it is called accumulated depreciation. This is taken away from the original value of the assets.

For instance let’s say a lorry worth €50,000 has a ten year life. If we use straight line deprecation, deprecation every year will be €5,000. By year 6 the accumulated balance will be €30,000. This is what it would look like in the balance sheet.

At the start of year 7 the asset will be only worth €20,000. This shows the true value of a 6 year old lorry.

Is there an example I can see?
Of course check out this video below:

Planning and recording adjustments for depreciation 14.5

Uploaded by  on 20 Feb 2012

Bad Debts

What are bad debts?
Bad debts are debts that have not being received from the debtor and look unlikely to be collected.

What happens if the debts are not collected?
Debts that will not be collected will be written off as an expense.

How do you process them in the accounts?
Bad debts will be put into the income statement and the balance sheet. Some companies make something called a bad debts provision. This means that the company sets aside some funds if a debtor does not pay its debts.
The provision is usually 1% or 2% of the total receivables account.

Super Duper Value, is a new firm which is a supermarket. Here are their sales on credit and cash received from its receivables.

 Year               Sales on credit                         Received from Receivables
2010                    500,000                                           300,000

The account has a balance of 200,000. A provision is created. It will be 1% of the year end figure. There will need to be an account see up for this provision as shown below. The debit side in the bad debts account will be put into the income statement while the credit side will be put into the balance sheet as shown below.

The provision for bad debts is in accordance with the concept of prudence where we provide for all foreseeable loses. No bad debts have been written off. Super Duper Value expects that its some of its customers will not pay.

Check out this video to learn more about bad debts:

Bad Debts  

Uploaded by on Oct 17, 2010

provisons for bad or doubtful clients

Check out this link to learn more about Bad Debts:

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