ZIMSEC O-Level Principles of Accounting (4051)
Adjustments to Final Accounts: notes
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Accrued and Prepaid Expenses
- Accrued expense: an expense used up but not yet paid. Add it to the expense and show it as a current liability. Example: rent of $200 owing at year end, so rent expense rises by $200 and accruals show $200.
- Prepaid expense: an expense paid in advance for next period. Remove it from this year's expense and show it as a current asset. Example: $150 insurance paid for next year, so insurance expense falls by $150 and prepayments show $150.
Income Received in Advance and Accrued Income
- Income received in advance: money received before it is earned. Remove it from income and show it as a current liability. Example: $300 rent received for next year, so rent income falls by $300.
- Accrued income: income earned but not yet received. Add it to income and show it as a current asset. Example: $80 commission earned but unpaid, so commission income rises by $80.
Depreciation
- Depreciation: the fall in value of a fixed asset over its useful life, charged as an expense.
- Straight line method: the same amount each year. Example: a van costing $5,000 with a $1,000 scrap value over 4 years gives $1,000 a year.
- Reducing balance method: a fixed percentage of the value at the start of each year. Example: 20% on a machine costing $1,000 gives $200 in year 1 and $160 in year 2 (20% of $800).
Disposal of Assets
- Disposal: selling or scrapping an asset. Work out the profit or loss by comparing sale proceeds with the net book value (cost minus accumulated depreciation).
- Example: a machine costing $1,000 with $600 accumulated depreciation sold for $300. Net book value is $400, so the loss is $100.
Bad Debts and Provision for Doubtful Debts
- Bad debt: a debt that will never be paid. Write it off as an expense in the income statement.
- Provision for doubtful debts: an amount set aside for debts that may not be paid. Example: debtors are $2,000 and a 5% provision is needed, so the provision is $100. If the existing provision is $60, increase it by $40 as an expense.
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