PRACTICAL ACCOUNTING
OTHER ADJUSTMENTS AND
CLOSING ENTRIES
CHRISTOPHER MONGROO
Other Adjustments
Before we prepare Financial Statements, there
may be some information not yet accounted
for.
As an accountant, your role is to prepare and
report accurate financial information.
Other entries may include:
• Depreciation
• Accruals & Prepayments
• Provision for Bad and Doubtful Debts
Depreciation
Process of spreading the original cost of
a non-current asset, over the accounting
period, in which its benefit will be felt
An asset is a resource controlled by the
entity from which future economic
benefits are expected to flow
A legitimate non-cash expense recorded
on the P&L account
Depreciation
Causes of depreciation
1) Physical Deterioration
Physical depreciation – wear & tear in
motor vehicles, machinery etc.
Erosion, rust, rot and decay – caused by
elements of nature e.g. land can be
eroded, metal can rust, wood can rot
Depreciation
Causes of depreciation cont’d
2) Economic factors
Obsolescence – advanced technology
can cause products to become outdated
Inadequacy – assets that are no longer
used after experiencing growth and
change in size of business
Depreciation
Causes of depreciation cont’d
3) Time factor – assets that are useless after
a time period e.g. patents
A patent is the exclusive right to market a
particular invention. It is an asset as it brings
future economic value to a company
4) Depletion – consumption of natural
resources such as mines, quarries and oil
wells
Depreciation
Methods of calculating depreciation
Two main methods:
1) Straight-line method
Fixed charge using, Cost Price of Asset and
estimated years of useful life
2) Reducing balance method
Variable charges using, Net Book Value of
Asset and rate of depreciation
Depreciation
Straight-line method
Cost price of an asset divided by the number
of years of useful life to calculate annual
depreciation
Scenario: Bought vehicle costing $44,000 with
a useful life of 4 years and with a disposal
value of $4,000
What is the annual depreciation charge?
Depreciation
Straight-line method
Annual depreciation charge:
Cost price less disposal value
Useful life i.e. # of years
$44,000 - $4,000
4 years = $10,000 per year
Depreciation
Reducing Balance method
Calculates depreciation with a fixed
percentage of depreciation
Year 1 - cost price of asset multiplied by
depreciation rate
Year 2 and onwards – cost less accumulated
depreciation, multiplied by depreciation rate
i.e. NBV x Depreciation %
Depreciation
Reducing Balance method
Scenario: Bought asset costing $10,000 with
an agreed depreciation rate of 20%
What is the annual depreciation in the first
three (3) years
Depreciation
Reducing Balance method
Cost price - $10,000 / Depreciation rate 20%
Depreciation workings:
Year 1 [20% x $10,000 = $2,000]
Year 2 [20% x (10,000-2000) = $1,600]
Year 3 [20% x (10,000-2000-1600) = 1,280]
Depreciation
Accounting treatment – Depreciation
To record a depreciation charge
Debit: Depreciation expense [P&L]
Credit: Provision for depreciation [B/S]
To record a reversal of depreciation
Debit: Provision for depreciation [B/S]
Credit: Depreciation expense [P&L]
Accruals and Prepayments
Business expenses may not always be fully
paid, some may be under or overpaid
In accounting, expenses pertaining to the
period MUST be accounted for properly
Accruals – an expense that has been
incurred but not yet paid
Prepayments – an expense that has been
paid for in advance
Accruals
Scenario
Annual Rent Expense - $12,000
$3,000 - payable every quarter end
Payment dates – 31 March 2017, 2 July
2017, 4 October 2017 and 5 January 2018
paying $3,000 respectively
Accruals
Rent
Date Details Amount Date Details Amount
2017 $ 2017 $
31-Mar Bank 3,000
2-Jul Bank 3,000 31-Dec Profit & Loss 12,000
4-Oct Bank 3,000
31-Dec Accrued c/d 3,000
12,000 12,000
2018
1-Jan Accrued b/d 3,000
Prepayments
Scenario
Annual Insurance Expense - $840
$210 - payable every quarter end
Payment dates – 28 February 2017 ($210),
31 August 2017 ($420) and 18 November
2017 ($420)
Accruals and Prepayments
Insurance
Date Details Amount Date Details Amount
2017 $ 2017 $
28-Feb Bank 210
31-Aug Bank 420 31-Dec Profit & Loss 840
18-Nov Bank 420
31-Dec Prepaid c/d 210
1,050 1,050
2018
1-Jan Prepaid b/d 210
Provision for Bad and
Doubtful Debts
Bad debts – a debt (amount owed to you)
that we will not collect
It is to be written-off as an expense/loss
Accounting treatment:
Debit: Bad debts Expense [P&L]
Credit: Accounts Receivable [B/S]
Provision for Bad and
Doubtful Debts
Provision for doubtful debts – a debt
(amount owed to you) that we may not
collect
We must therefore make a provision for such
situation
Accounting treatment to increase provision:
Debit: Provision for Bad debts Expense [P&L]
Credit: Accounts Receivable [B/S]
Provision for Bad and
Doubtful Debts
If the financial situation change with the
customer/debtor, it is likely that amounts can
now be collectible
The provision should now be reversed
Accounting treatment to decrease provision:
Debit: Accounts Receivable [B/S]
Credit: Provision for Bad debts Expense [P&L]
Other Accounting terminology
Capital expenditure – money spent to buy
assets or anything to add value to the
business
Revenue expenditure – spending that does
not increase the value of assets but is
incurred in day to day running of the
business
Summary
• Depreciation – definition, types, accounting
treatment
• Accruals and Prepayments – definition and
accounting treatment
• Provision for bad debts – definition and
accounting treatment
• Other key accounting terminology – Capital and
revenue expenditure
