BALANCE DAY

ADJUSTMENTS &
PREPARATION OF C

FINAL ACCOUNTS
CHAPTER 6
 Adjustments for Financial Statements

Among the adjustments are:

1. Accruals and Prepayments
2. Bad debts written off
3. Allowance for doubtful Debts
4. Depreciation
5. Capital expenditure & Revenue Expenditure
 Accruals and Prepayments

• Adjustments are necessary because:

Some expenses have been paid in advance – eg: insurance, subscriptions
Some expenses have been incurred (services have been used) but not yet paid - eg:
electricity
Some revenues have been earned (services have been provided) but payments are
not yet received eg: Commission received
Some revenues have been received (cash is received) but not yet earned (services
are not provided yet) eg : Rent received
 Accrued Expenses
EXAMPLE:
Financial year end: 31 December 2017
Electricity expenses RM200 for December 2017 will be paid in January 2018.

SOPL
SOPLf.t.y.e
f.t.y.e 31 December
December2017
2017 SOFP
SOFPas
as at
at 31 December
December2017
2017

Operating
OperatingExpenses:
Expenses: Current
CurrentLiability:
Liability:
Electricity
Electricityexpense
RM2000 +RM2000
RM200+ RM200 Accrued
Accruedelectricity
electricityexpense
expense RM200
RM200
 Prepaid Expenses
EXAMPLE:
Financial year end: 31 December 2017
Insurance expenses paid RM1,200 were for the period of 1 April 2017 – 31
March 2018.
Insurance per month: RM1200/12 = RM100
Prepaid expenses: RM100 x 3 months = RM300
SOPL f.t.y.e 31 December 2017 SOFP as at 31 December 2017

Operating Expenses: Current Assets:

Insurance expense RM1,200 – RM300 Prepaid insurance expense RM300
 Accrued Revenues
EXAMPLE:
Financial year end: 31 December 2017
Commission revenue RM500 for December 2017 is not yet received.

SOPL f.t.y.e 31 December 2017 SOFP as at 31 December 2017

Other Revenues: Current Asset:

Commission received RM1,000 + RM500 Accrued comm revenue RM500
 Revenues Received in Advance
EXAMPLE:
Financial year end: 31 December 2017
Rent received in December 2017 was RM1,200, but half of it was for January
2018.
SOPL f.t.y.e 31 December 2017 SOFP as at 31 December 2017

Other Revenues: Current Liability:

Rent received RM1,200 – RM600 Rent received in advance RM600
 Bad Debts
• Amount of debtors who are not be able to settle their debt

EXAMPLE:
Financial year end: 31 December 2017
One of the accounts receivable amounting to RM400 has been declared bankrupt and
is unable to settle his debts.
SOPL f.t.y.e 31 December 2017 SOFP as at 31 December 2017

Operating expenses: Current Assets:

Bad debt RM400 Account receivable M5,000 – RM400
 Allowance/ Provision for Doubtful Debts
• Some of the existing debtors unable to pay the amount that they owe to the
business.
• So, an estimation has to be made to total debtors for the amount that will probably
not be collected.
• Only the increase and decrease in estimation is recorded.

An
Anincrease
increaseininAFDD AAdecrease
AFDD decreaseininAFDD
AFDD

Treated as an expense in SOPOL Treated as a revenue in SOPOL

 Allowance/ Provision for Doubtful Debts
• On 31 December 2017, accounts receivable’s figure is RM200,000 and it is estimated that 1% of
debtors will be uncollectible.
• AFDD at 1 Jan 2017 = RM1,200

Calculation:
AFDD at 31/12/2017 = 0.01 x RM200,000 = RM2,000
Increase in AFDD = RM2,000 – RM1,200 = RM800
SOPL f.t.y.e 31 December 2017 SOFP as at 31 December 2017

Operating expenses: Current Assets:

Increase in AFDD RM800 Account receivable RM200,000
Less: AFDD (RM2,000)
 Allowance/ Provision for Doubtful Debts
• On 31 December 2017, accounts receivable’s figure is RM200,000 and it is estimated that 1% of
debtors will be uncollectible.
• AFDD at 1 Jan 2017 = RM2,500

Calculation:
AFDD at 31/12/2017 = 0.01 x RM200,000 = RM2,000
Decrease in AFDD = RM2,500 – RM2,000 = RM500

SOPL f.t.y.e 31 December 2017 SOFP as at 31 December 2017

Other Revenues: Current Assets:

Decrease in AFDD RM500 Account receivable RM200,000
Less: AFDD (RM2,000)
Depreciation
Causes:
• Physical deterioration
• Wear and tear
• Erosion, rust, rot and decay

• Economic factors
• Obsolescence

• Time
• Depletion
 Depreciation - Straight line method
DEP = COST - SALVAGE VALUE
USEFUL LIFE

Example:
Purchase of machinery worth RM40,000 in January 2017. Useful life 5 years. Salvage value
is RM5,000. Accounting year end 31 Dec.

Depreciation = RM 40,000 –RM 5,000

5 years

= RM 7,000 each year for five years

 Depreciation - Reducing balance method
Example:
Purchase of building worth RM400,000 in January 2015. The rate
charged is 10% yearly basis. The accumulated depreciation on 31 December 2016 is RM76,000. Accounting
year end 31 Dec 2017

Depreciation = Net book value x %

=(Cost – Accumulated depreciation) x %

= (RM400,000 – RM76,000) x 10%

= RM32,400
Depreciation: Accounting Treatment
SOPOL for the year ended 31/12/2017
Operating Expenses RM
Depreciation 32,400

Statement of FP as at 31/12/2017

Cost Acc. Dep NBV

RM RM RM
Building 400,000 (108,400)* 291,600

* RM76,000 + 32,400
 CAPITAL EXPENDITURE VS REVENUE
EXPENDITURE
Capital expenditure incurred Revenue Expenditure
when business spends money • Expenditure incurred for day to day
either to: operation.
 buy non-current assets (fixed
assets), or
 add to the value of an existing
non-current asset (Fixed assets).
 CAPITAL EXPENDITURE VS REVENUE
EXPENDITURE
Capital expenditure included in such Revenue expenditure included:
amounts should be spending on:
• acquiring non-current assets/ • repair & maintenance on
purchase of fixed assets assets
• bringing them into the business; • purchase fuel for motor
• legal costs of buying buildings; vehicles.
• carriage inwards on machinery • Road tax & insurance
bought;
• any other costs needed to get a non-
current asset ready for use.
Thank You….