Adjusting Entries

13 : Prov. Doubtful Debt, Bad Debt & Prov. Discount Allowed. 14 : Prov. For Depreciation 15 : Accrual and Prepayments

Adjusting Entries
 Required

entries every time financial statements are prepared. need adjustment?

 Why
– –

Some events are not necessary to record it daily Some items maybe unrecorded.

Cont’d
 What
– – –

are the adjusting entries?

Bad debts and provision for doubtful debts Fixed assets depreciation Accruals and Prepayments

Bad debts, Provision for Doubtful Debts, and provision for discounts on debtors
 Bad
– – –

Debts  Why bad debts
When a debtors cannot afford to pay their debts (bankrupt) A Death Debtors cannot be found

 Bad

debts – expense  Recovered bad debts? – other revenue

Provision for Doubtful Debts
 Estimation

of debts that probably will be a

bad debts.  This estimation will be an yearly EXPENSE  Provision for Doubtful debts will be calculated

* (debtors – additional bad debts)

*Net debtors x provision %

Provisions for cash discounts on debtors (PDA)
 Business

create a provision for cash discounts to be allowed on the debtors outstanding at the balance sheet date.  This estimation is based on the net figure of (net debtors – PDD).  Not allowed in the bad debts.

Fixed Assets Depreciation

Why depreciation?

Physical deterioration
• •

Remember nature of fixed assets?

Wear and tear Erosion, rust, rot and decay
RM

Economic Factors
 

Obsolescence Inadequacy

25,000 20,000 15,000 10,000 5,000 1,000 100 7 6 5 4 3 2 1 Years

Time

Items to be remembered
 

  

Cost Value – Value or price of the assets Residual value – Scrap value ( the remaining amount all after its depreciate.) Useful life – The estimated years of use. Net Book Value – remaining balance after depreciation. Accumulated depreciation – (susutnilai terkumpul)

Methods of depreciation

Straight Line Method (SLM)
Cost (Price) - Scrap Value Estimated useful life

@ % on cost (price)

Reducing Balance Method (RBM)
find percentage of RBM r =1 -

@ % on net book value

ACCRUALS AND PREPAYMENTS
The third adjusting entries

Accrued Revenue
 Accrued

Prepaid Revenue
 Prepaid

Revenue

Revenue

Revenue/income (ENTITLED in the accounting year) that which has NOT BEEN RECEIVED by the end of the period.

Revenue (which is NOT ENTITLED in the accounting year) has been RECEIVED by the end of the period.

Accrued Expenses Prepaid Expenses
 Accrued

Expense

 Prepaid

Expenses

Expense (ENTITLED in the accounting year) that which has NOT BEEN PAID yet by the end of the period

Expense (NOT ENTITLED in the accounting year) that which has BEEN PAID early by the end of the period

Accruals – Add in IS Prepayments-Less in IS

Adjusting entries
Accruals Prepayments Accruals Prepayments

I/S
Add (revenue) Less (revenue)

B/S
CA CL

Revenue

Expenses

Add (expense) Less (expense)

CL CA

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