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FINANCIAL STATEMENTS
Edwin C. Mbwambo
Learning objectives
Adjust financial statements with outstanding
expenses and income
Adjust financial statements with prepaid expenses and
income received in advance
Adjust financial statements with bad debt and
provision for doubtful debt.
Prepare financial statements with adjustments
Introduction
Accounting concepts that guide adjustments
Discuss how these concepts apply in accounting?
Accrual concept – used to recognise revenue and
expenses. Recognise revenue when earned and expenses when
incurred.
Matching concept – used to match revenue and
expenses of same accounting period in order to determine
profit/comprehensive income for the year.
Periodicity – require that firms are periodically assessed to
determine their performance and financial position. This period
is known as accounting period.
Adjustments for outstanding Expenses
Expenses may be due but not yet paid; this is referred
to accrued/outstanding expenses
It is common to receive salaries of previous month
during early dates on the next month. E.g., salary of
December is received in January.
Accrued expenses is a current liability.
It is adjusted using the following entry
Debit - expenses account
Credit - outstanding expenses
Adjustments for outstanding Expenses
Example 1
Required
Determine insurance income in Insurance’s books of account
and extract SCI and SFP on 31st December 2012 to effect this
transaction
Comprehensive example 5
Consider three accounts in the books of Malumbano whose
balances on 31/12/2012 were insurance prepaid TZS 0.56m, wages
outstanding TZS 0.3m and rent received in advance TZS 0.35m
During 2013 Malumbano paid insurance TZS 1m; wages, TZS 15m,
and received rent TZS 2.6m. It established that at 31st December
2013 balance of prepaid insurance will be TZS 0.345m, rent received
in arrear TZS 0.1m, accrued wages TZS 0.42m
Required:
Prepare insurance, wages, and rent account for the year ended
31/12/2013
Prepare statement of comprehensive income (extract) showing clearly
the amount transferred from each of the accounts above
Prepare statement of financial position (extract) as at 31/12/2013
Insurance account Credi
Debit
“000” t
1/1/13 Balance b/d 560 31/12 Balance c/d 345
Notes:
• Adjustments were made outside financial statement
• It is possible to make adjustments within financial
statements (example to be provided)
Malumbano
Statement of Comprehensive Income (extract) for the year ended
31/12/213
Income
Rent received 3,050,000
Less Expenses
Insurance 1,215,000
Wages 15,120,000
Malumbano
Statement of financial position (extract) as at 31/12/213
Current assets
Prepaid insurance 345,000
Accrued rent income 100,000
Current Liabilities
Wages outstanding 420,000
Adjustments for bad debt and provision for
doubtful debt
When a debtor fail to pay her debt, the debt is called
bad debt – it is an expense
When debt is not yet known as bad by the end of
accounting period is it may be considered as doubtful
debt.
Doubtful debts are usually estimated (provision for)
Both bad debt and doubtful debt reduces balance of
debtor.
Adjustments for bad debt
Bad debt is an expense, therefore it appears in
comprehensive income/income statement
It reduces debtor’s account balance (written off from
debtor account)
Entries to create bad debt are
Debit – Bad debt account
Credit – debtors account (to reduce debtors account)
Adjustments for provision for bad and
doubtful debt
Some debtors may become bad, however this may not
be known at the end of the accounting period.
To match revenue and expense therefore we need to
provide estimates on bad debt and charge to SCI and
It reduces the balance of debtors’ account in the SFP.
To make this adjustment we pass the following entries
Debit – Statement of comprehensive income
Credit – Provision for bad and doubtful debts
Example 6
Assume in year 2012 estimated bad debts were TZS
100,000. In year 2013 actual bad debts written
amounted to TZS 80,000 and the provision for bad
and doubtful debts for year 2013 is TZS 140,000. notes
PDD is 10% on debtors
Required.
a. Prepare a provision for doubtful account to record
the transactions for the year 2013 to determine figures
to be used in SCI and SFP
b. Prepare SCI and SFP (extracts) 2013
PROVISION FOR BAD AND DOUBTFUL DEBT
ACCOUNT
Date Details Amount Date Details Amount
(TZS) (TZS)
1/1/2013 Balance b/d 100,000
Administrative expenses:
Bad debt 80,000
Increase in provisions for bad and doubtful debt 40,000 120,000
Current assets:
Debtors 1,400,000
Less: Provisions for bad and doubtful debt 140,000 1,260,000
Notes:
Increase in provision is considered as an expense in I/S
Decrease in provision is considered as income.
Comprehensive example 7
The following trial balance was extracted from the
books of A. Haidari on 31st March 2013. In addition, the
following are additional information
Stock 31st March 2013 TZS 3,500,000; salaries and
wages accrued TZS 90,000; rent prepaid TZS 140,000;
van expenses owing TZS 60,000; and increase in
provision for bad and doubtful debt TZS 100,000
Required.
Draw up a statement of comprehensive income and
statement of financial position as at 31st March 2013
A. Haidari trial balance as at 31th March 2013
Debit Credit
Sales and Purchases 11,000,000 19,500,000
Cash and bank 2,000,000
Drawings and share capital 2,500,000 9,600,000
Furniture 1,500,000
Rent 1,200,000
Salaries and wages 2,000,000
Discounts 600,000 300,000
Debtors and creditors 4,900,000 2,500,000
Provision for bad and doubtful debt 300,000
Inventories as at 1st April 2012 2,900,000
Delivery van 2,400,000
Van expenses 400,000
Bad debt written off 800,000
Total 32,200,000 32,200,000
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