ACCOUNTING REVIEW

At the end of an accounting period, it is customary to close all the accounts, extract a
trial balance, and then prepare the set of final accounts : the income statement and the
balance sheet. Hence the general flow of accounting data is as follows :

Transactions Journal Entries Ledger Entries Trial Balance Final Accounts

This general flow of data, however, makes the assumption that the accounting entries for all
the transactions are final and complete. In this case, all the postings are taken en bloc from the
trial balance to either the income statement or the balance sheet. However, this may not be
the case in reality for all the accounting entries. Some items or transactions may need to
be adjusted before they are taken to the final accounts. Among the adjustments common at
this stage in the accounting process are :

1. ADJUSTMENTS FOR INVENTORY OR STOCK

The items of stock in use during the period may not have been sold off at year end. The
firm usually conduct a stock count at the end of the period, and make a determination
regarding the stock left over :

a) Stock on Hand in Saleable Condition or of a Material Value

This is classified as closing stock. It is subtracted in the cost of sales calculation in the
income statement, and carried forward to the balance sheet as an item of current asset.

b) Stock on Hand That is in Un-saleable Condition or of An Immaterial Value

A portion of the stock may prove to be damaged, expired, or otherwise in an un-saleable

condition. It would become necessary for the value of this portion of stock to be written down
or completely written off. This reduction in the value would be treated as an expense. This
may be referred to as stock written off. Hence it is subtracted in the cost of sales
calculation, and then written off as expense in the income statement

c) Stock Taken by the Owner for Personal Use

Items taken by the owner for personal use are accounted for as drawings. This may include a
portion of stock. Stock drawings during the year would have been posted as Dr Drawings
and Cr Purchases, and would already appear in the Trial Balance. However, new stock
drawings as stated in the footnotes would be subtracted in the cost of sales calculation and
added to the drawings in the trial balance, the total of which would go to the balance sheet.

1
2. ADJUSTMENTS TO THE ITEMS OF REVENUE AND EXPENSES

The amount incurred for items of revenue and expenses must be matched together in the
income statement in order to derive the profit or loss for the period. However due to the
nature or timing of these items, the amount recorded in the trial balance may not
correspond with the actual amount incurred for the given period.

The adjustments to the items of revenue and expenses may include :

a) Amount Owing or Unpaid

A portion of an item of revenue or expense may be unpaid at the end of the year. This is
referred to as owing, or an accrual, or an amount due, or amount outstanding. The unpaid
portion must be added to the amount already recorded in the trial balance and the adjusted
total reflected in the income statement. The outstanding portion would also be taken to the
balance sheet as follows :

Expense Owing or Unpaid = Current Liability Revenue Owing or Unpaid = Current Asset

b) Amount Paid in Excess

An item of revenue or expense may have been paid in excess at the end of the year. This is
referred to as a prepayment, or payment in advance. The excess amount must be subtracted
from the amount recorded in the trial balance, and the adjusted amount taken to the income
statement. The prepaid amount would be shown in the balance sheet as follows :

Expense Prepaid = Current Asset Revenue Prepaid = Current Liability

In summary, the adjustment for revenue and expenses that are owing or prepaid may be
approached as follows

i. Always add accruals [ owing ] and subtract prepayments

ii. The amount owing or paid in excess is taken to the balance sheet as follows

Expenses Revenue

Owing CL CA
Prepaid CA CL

2
3. ADJUSTMENTS TO THE DEBTORS

When goods are sold on credit , the firm maintain a schedule of all its credit customers
found in the sales ledger. Collectively, they are called debtors. At the end of an accounting
period, the list of debtors must be reviewed and appropriate adjustments made. Among
these are :

a) Bad Debts

The firm might have determined that an amount owned by one or more of its credit
customers at year end may be deemed as uncollectable. This is called a bad debt. The bad
debt is to be included as expense in the income statement.

b) Bad Debt Recovered

An account which was written off in previous periods as a bad debt, may now be deemed
to be recoverable. This is known as a bad debt recovered. It is recorded as a revenue in the
income statement.

c) Provision for Bad or Doubtful Debt

Of the list of debtors on hand at the end of the accounting period after such adjustments as
bad debts written off or bad debt recovered, the firm may make a further evaluation in
order to determine the future collectability of the amounts outstanding. Given any indication
of uncertainty, the firm is allowed to make a futuristic adjustment to the debtors, called a
provision for bad debts or a provision for doubtful debts.

The amount for the provision for bad debt is carried from one period to another, with
specific adjustments for the given period. The adjustment may result in an increase or
decrease, hence the amount for the provision may fluctuate from year to year. The adjusting
amount goes to the income statement as either an expense ( if there is an increase) or as
an addition to the revenue ( if there is a decrease ). The new provision for bad debt is taken
to the balance sheet where it is subtracted from the debtors on hand under the current
assets. The general approach to the adjustment for the provision for bad debts is as
follows :

i. The old or previous Provision for Bad Debt as found in the Trial Balance O

ii. The new or current Provision for Bad Debt as calculated O

(This amount will be subtracted from the debtors in the balance sheet )

iii. The adjusting amount or the difference between the previous and the O
current provision
(This amount goes to the income statement as either revenue if it’s a
reduction, or expense if its an increase)

3
 4. ADJUSTMENTS TO THE NON-CURRENT OR FIXED ASSETS

The non-current or fixed assets are acquired to be used by the firm in providing its goods
and services. They are used over a period of time, commonly referred to as the useful life
of the asset. During this time, the assets will generally have an attrition or impairment of
value. This is known as depreciation. Hence the following adjustments may be necessary
for the non-current, or fixed, assets

a) Depreciation of the Non-Current, or Fixed Assets

Depreciation is the impairment or reduction in the value of an asset over time. This may
be as a result of various factors, such as: constant wear and tear, obsolescence, physical
deterioration, technological changes, inadequacy in size or capacity. The amount by which
the asset is reduced each year is included as an expense in the income statement. Where
the asset was acquired or disposed of during the year, the deprecation charge for that year
may be pro-rated to reflect the number of months of usage of the asset.

The amount of depreciation is summed year by year, and the total is referred to as the
provision for depreciation. This total is taken to the balance sheet where it is subtracted from
the cost of the respective non-current asset. Hence in the balance sheet, each non current
asset is laid out to show its cost, the total of the provision for deprecation, and the net
book value, that is, the cost less the provision for depreciation to date

Among the methods of calculation of depreciation are :

i. The Straight Line Method ( Cost- based Method). In this approach, the cost of the
asset is multiplied by a given percentage rate. Both the rate and the cost are fixed, hence the
depreciation charge works out to be a fixed amount each year.

ii. The Reducing Balance Method ( The Book Value based Method ) This method
focuses on the last written down value or the net book value of the asset The written
down value, that is, the cost less the provision for depreciation to date, is multiplied by the
given percentage rate. Since the value of the asset goes down each year, then the amount of
depreciation also goes down each year.

4
5. ADJUSTMENT TO THE NON-CURRENT LIABILITY

The non-current liability constitutes the external source of financing in the business. It is
also known as debt financing. This may be obtained in the form of a loan, mortgage, or
debenture. Among the adjustments that may be required are :

i) The Current Portion of the Liability

Generally, the debt financing is classified as a non-current, or long term liability. However
at times the debt is scheduled to reflect a portion due in the short term. Hence the item is
separated into two parts, with the current portion placed under the current liability, and
the remainder placed under the non-current liability.

ii) The Interest Charged on the Debt.

At times there is an interest to be charged on the debt financing item. This is usually
reflected as a rate of x% . Hence the loan would be written as a x% loan. This means
that the amount of interest to be charged is to be derived as x% of the loan figure. The
interest charged would be shown as an expense in the income statement.

Where a portion of the interest have already been paid, this would be shown in the trial
balance. If the amount paid is less than the amount as calculated, the difference would be
treated as an accrual, that is, added to the amount already paid in order to derive the full
expense amount. The difference would also be shown as a current liability in the balance
sheet

5
Ricardo Salas operates a retail business in Mexico. The following trial balance was
obtained as at December 31, 2017

DETAILS DR CR
Land and Building 180,000  
Provision for Depreciation on Building   32,000
Motor Vehicle 170,000  
Provision for Depreciation on Motor Vehicle   24,000
Machinery and Equipment 120,000  
Provision for Depreciation on Machinery & Equipment   13,200
Capital   240,000
Drawings 8,200  
10% Loan   100,000
Building Repairs 35,000  
Commission Received   20,000
Opening Stock 32,400  
Insurance 18,500  
Bad Debts 4,250  
Sales   416,500
Wages and Salaries 45,000  
Discounts 3,500 6,000
Loan Interest 9,000  
Creditors   25,600
Returns 2300 4,100
Rent Received   14,000
Purchases 245,450  
Debtors 31,000  
Provision for Bad Debts   4,200
Telephone Charges 8,200  
Bank   21,600
Cash 8,400  
  921,200 921,200

6
Additional information available :

1. Stock at the end of the year was $45,000

2. Provide for depreciation of the non current assets as follows

Land and Building 10% Straight Line

Machinery and Equipment 5% Reducing Balance
Motor Vehicle 10% Reducing Balance
.

3. The provision for bad debts is to be adjusted to 10% of the debtors

4. The commission is owing by $5000

5. The wages and salaries is owing by$5,000; and the insurance is prepaid by $3,500

Required

Prepare the statement of profit and loss for the year ending December 31, 2017, as well as the
statement of financial position as at that date

Ricardo Salas      

7
Statement of Profit and Loss      
For Year Ending December 31, 2017      
  $ $ $
1. Net Sales      
Sales   416,500  
Less Return Inwards   (2,300)  
Less Discount Allowed   (3,500) 410,700
       
2. Less Cost of Goods Sold      
Opening Stock   32,400  
Add Purchases   245,450  
Less Return Outwards   (4,100)  
Less Discount Received   (6,000)  
Less Closing Stock   (45,000) (222,750)
       
Gross Profit     187,950
3. Add Other Revenue      
Commission Received 20,000  
Add Commission Owing 5,000 25,000  
Rent Received   14,000  
Reduction in PFBD   1,100 40,100
      228,050
4. Less Other Expenses      
Building Repairs   35,000  
Insurance 18500    
Less Insurance pp (3,500) 15,000  
Bad Debts   4,250  
Wages and Salaries 45,000    
Add Wages owing 5,000 50,000  
Loan Interest 9,000    
Add Interest owing 1,000 10,000  
Telephone Charges   8,200  
Depn Building   18,000  
Motor Vehicle   14,600  
Machinery and Equipment   5,340 (160,390)
Net Income     67,660

Ricardo Salas      

8
Statement of Financial Position      
As at December 31, 2017      

1. NON-CURRENT ASSETS  COST  Tot Depn NBV

130,00
Land and Building 180,000 (50,000) 0
101,46
Machinery and Equipment 120,000 (18,540) 0
131,40
Motor Vehicle 170,000 (38,600) 0
362,86
  470,000 (107,140) 0

2. CURRENT ASSETS      
Closing Stock   45,000  
Debtors 31000    
Less New PFBD (3100) 27,900  
Cash   8400  
Revenue Owing [ Commission ]   5,000  
Expense prepaid [ Insurance ]   3,500 89,800
452,66
      0

3. OWNER'S EQUITY      
Capital   240,000  
Add Net Income   67,660  
299,46
Less Drawings   (8200) 0

4. NON-CURRENT LIABILITY      
100,00
Loan     0

5. CURRENT LIABILITIES      
Creditors   25,600  
Bank Overdraft   21,600  
Expense owing [ Loan interest ]   1,000  
[ Wages and salaries ]   5,000 53,200
452,66
      0

9
TUTORIAL QUESTIONS

1. From the following list of Balances in the books of Adam Cartwright , as at

August 31, 2018, prepare the set of final accounts :

DETAILS DR CR
Commission Received   12,000
Carriage Outwards 4,200  
Bank   34,000
Cash 4,500  
Creditors   22,000
Discount Received   8,000
Purchases 210,000  
Debtors 34,000  
Opening Stock – September 1, 2017 22,500  
Insurance 8,000  
Carriage Inwards 6,000  
Sales   622,200
Wages and Salaries 84,500  
Return Inwards 4,000  
Land and Building 400,000  
Fixtures and Fittings 82,000  
Motor Vehicle 200,000  
Capital   350,000
Machinery and Equipment 120,000  
Drawings 3,500  
Loan   150,000
Loan Interest 15,000  
  1,198,200 1,198,200

End Note : Stock at August 31, 2018 was $55,000

10
SOLUTION

Adam Cartwright
Statement of Profit and Loss
For Year Ending August 31, 2018

1. NET SALES      
Sales   622,200  
Less Return Inwards   (4,000)  
Less Discount Allowed   0 618,200
       
2. LESS COST OF GOODS SOLD      
Opening Stock   22,500  
Add Purchases   210,000  
Less Return Outwards   0  
Add Carriage Inwards   6,000  
Less Discount Received   (8,000)  
Less Closing Stock   (55,000) (175,500)
Gross Profit     442,700
       
3. ADD OTHER REVENUE      
Commission Received     12,000
      454,700
       
       
4. LESS OTHER EXPENSES      
Carriage Outwards   4,200  
Insurance   8,000  
Wages and Salaries   84,500  
Loan Interest   15,000 (111,700)

11
 Net Income     343,000

Adam Cartwright
Statement of Financial Position
As at August 31, 2018

1. NON-CURRENT ASSETS      
Land & Building   400,000  
Fixtures & Fittings   82,000  
Machinery & Equipment   120,000  
Motor Vehicle   200,000 802,000
       
2. CURRENT ASSETS      
Closing Stock   55,000  
Debtors   34,000  
Bank [ Dr Side ]   0  
Cash   4,500 93,500
Total Assets     895,500
       
3. OWNER'S EQUITY      
Capital   350,000  
Add Net Income   343,000  
Less Drawings   (3,500) 689,500
       
4. NON-CURRENT LIABILITY      
Loan     150,000
       
5. CURRENT LIABILITY      
Creditors   22,000  
Bank OD [ Cr Side ]   34,000 56,000
Total Equity & Liabilities     895,500

12
 2. The following balances were obtained from the books of David Simmonds, a trader
in Brazilian hair extensions and wigs, at December 31, 2013 :
Capital   175,000
10% Loan   120,000
Land & Building 250,500  
Fixtures and Fittings 82,000  
Machinery and Equipment 25,000  
Motor Vehicles 65,000  
Provision for Depreciation :    
Land and Building   51,000
Fixtures and Fittings   16,400
Machinery and Equipment   13,200
Motor Vehicles   8,500
Debtors 35,000  
Provision for Bad Debts   3,740
Motor Vehicle Repairs 6,000  
Carriage Inwards 1,085  
Creditors   13,200
Discount Received   8,000
Office Expenses 6,200  
Sales   197,200
Purchases 100,590  
Commission Received   7,200
Wages and Salaries 32,400  
Drawings 5,500  
Stock of Goods at January 1 17,050  
Loan Interest Paid 7,000  
Bank   38,535
Cash 17,200  
Bad Debts 3,200  
Return Outwards   1,750
  653,725 653,725

13
Additional Notes

1. Stock at the end of the year in good condition was valued at 34,500

2. During the year stock valued at 9,500 was taken by the owner for personal use.
This was not yet recorded in the books

3. Adjustments are required for the following items of revenue and expenses

- Amounts owing for Commission : 5,800

- Wages and salaries prepaid : 2,400
- Office expenses owing : 3,800

4. The provision for bad debts is to be adjusted to 10% of the debtors

5. Depreciation charges for the year are as follows :

- Land and Building at 10% on the straight line basis

- Fixtures and Fittings at 5% on the reducing balance
- Machinery and Equipment at 10 % on the reducing balance
- Motor Vehicles at 5% on the straight line

6. Interest is to be charged at 10% on the loan.

Required

Prepare the income statement for the year ending December 31, 2013, and the balance
sheet as at that date

SOLUTION

14
QUESTION 2

NET SALES      
Sales     197200
less Return Inwards    0  
less Disc Allowed    0  
       
COST OF SALES      
Opening stock   17,050  
Purchases   100,590  
Less Return Outwards   (1750)  
Add Carriage Inwards   1,085  
Less Discount Received   (8,000)  
Less New Stock Drawings   (9,500)  
Closing stock   (34,500) (64,975)
Gross Profit     132,225
       
OTHER REVENUE      
Commission 7200    
Commission owing 5800 13000  
Reduction in PFBD   240 13,240
      145,465
       
OTHER EXPENSES      
Motor Vehicle Repairs   6000  
Office Expenses 6,200    
Add Office Expense owing 3,800 10,000  
Wages and Salaries 32400    
Less Wages and Salaries prepaid (2400) 30,000  
Loan Interest 7000    
Add Interest owing 5000 12,000  
Bad Debt   3,200  
Depreciation Land and Building   25,050  
Depreciation Fix and Fittings   3,280  
Depreciation Machinery   1,180  
Depreciation Motor Vehicle   3,250 (93,960)
Net Income     51,505

15
 NON CURRENT ASSETS  COST DEPN NBV
Land and Building 250,500 (76,050 174450
Fixture and Fittings 82,000 (19,680) 62,320
Machinery and Equipment 25,000 (14,380) 10,620
Motor Vehicle 65,000 (11,750) 53,250
      300,640
       
CURRENT ASSETS      
Stock   34,500  
Debtors 35,000    
Less PFBD (3,500) 31,500  
Cash   17,200  
Expense prepaid [Wages ]   2,400  
Revenue owing [ Commission]   5,800 91400
      392,040
       
OWNERS EQUITY      
Capital   175,000  
Net Income   51,505  
Drawings old 5500    
Drawings new 9500 (15000) 211505
       
NON CURRENT LIABILITY      
Loan     120,000
       
       
CURRENT LAIBILITIES      
Creditors   13,200  
Bank overdraft   38,535  
Expense owing Office   3800  
Expense owing Interest   5000 60535
      392040

3. The following balances were obtained from the books the The Moonshine Jar as at
August 31, 2014 :

16
 DETAILS DR CR
Opening Stock – Septeember 1, 2013 34,150  
Insurance 12,000  
Carriage Inwards 4,000  
Sales   475,000
Wages and Salaries 85,000  
Returns 4,200 2,350
Land and Building 375,000  
Fixtures and Fittings 110,000  
Motor Vehicle 130,000  
Capital   310,000
Machinery and Equipment 130,000  
Drawings 5,000  
Loan   400,000
Loan Interest 20,000  
Commission Received   20,000
Office Expenses 14,500  
Bank   9,150
Cash 17,500  
Creditors   22,400
Discounts 5,500 8,000
Purchases 245,000  
Debtors 51,000  
Carriage Outwards 4,050  
  1,246,900 1,246,900

Note

Stock at August 31, 2014 was 51,250

Required :

Prepare the income statement for the year ending August 31, 2014, and the balance sheet as
at that date

17
4. The Tottenham Rafters is a distributor of office supplies. The following balances were
obtained at December 31, 2016 :

DETAILS DR CR
Land and Building 180,000  
Provision for Depreciation on Building   32,000
Motor Vehicle 120,000  
Provision for Depreciation on Motor Vehicle   24,000
Machinery and Equipment 120,000  
Provision for Depreciation on Machinery & Equipment   13,200
Capital   240,000
Drawings 8,200  
10% Loan   100,000
Building Repairs 85,000  
Commission Received   20,000
Opening Stock 32,400  
Insurance 18,500  
Bad Debts 4,250  
Sales   416,500
Wages and Salaries 45,000  
Loan Interest 9,000  
Creditors   25,600
Rent Received   14,000
Purchases 245,450  
Debtors 31,000  
Provision for Bad Debts   4,200
Telephone Charges 8,200  
Bank   21,600
Cash 4,100  
  911,100 911,100

18
Additional information at the end of the year :

1. After the end of year stock count, the following decisions were made
- stock in good condition to be carried forward : 38,500
- stock in good condition to be taken for personal use : 8,000

2. A review of the items of expenses and revenue has shown that :

- telephone charges owing by $4,800
- wages and salaries prepaid by $6,000
- rent received is prepaid by $4,000
- commission of $2,500 is owing

3. The following depreciation schedule is to be applied:

- Land and building 10% on the straight line
- Machinery and equipment 10% on the reducing balance
- Motor Vehicle 10% on the straight line

4. Following a review of the debtors balance, it was decided that a general

provision for bad debt is to be maintained at 5%

5. The current portion of the 10 % loan is $25,000. The full loan interest, however,
should be taken into account.

Required :

Prepare the statement of profit and loss (income statement) for the year ending
December 31, 2016, and the statement of financial position (balance sheet) as at that
date

19