ACA Accounting Lecture Chap-6!10!29Jun2022

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Contents
Chapter 6 Errors and corrections to accounting records and financial statements
Chapter 7 Cost of sales and Inventory
Chapter 8 Irrecoverable debts and allowance for receivables
Chapter 9 Accruals and prepayments
Chapter 10 Noncurrent assets and depreciation
Accounting
CHAPTER 6
Errors and corrections to

accounting records and
financial statements
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Learning topics & Outcome
Upon completion of this chapter, you will be

able to:
1. Reconciling to external o Prepare a trial balance from accounting
documents records and identify the uses of a trial
balance
2. Bank reconciliations
o Identify omissions and errors in accounting
records and financial statements and
3. Types of error in accounting
demonstrate how the required adjustments
4. Correcting errors will affect profits or losses
o Correct omissions and errors in accounting
5. Adjusting the initial trial balance records and financial statements
for errors o Prepare journals for nominal ledger entry
and correct errors in draft financial
statements
Reconciling to external documents

VERIFICATION OF BALANCES
PAYABLES RECEIVABLES CASH
SUPPLIER PAYABLES CASH BANK

STATEMENTS ACCOUNT ACCOUNT STATEMENT
SUPPLIER STATEMENT
BANK RECONCILIATIONS
RECONCILIATIONS
CUSTOMER CUSTOMER
STATEMENTS STATEMENTS
CUSTOMER STATEMENT
RECONCILIATIONS
Accounting Reconciliations
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Trade Receivables and Trade Payables accounts

Trade receivables account: Receivables ledger:
• Is the nominal ledger, • is a listing of all transactions with each individual
credit customer,
• is used to record transactions relating to credit
customers in total. • shows the total balance due from that customer
at any point in time.
• The balance at any time will be the total amount
due to the business from all its credit customers. • is separate to the nominal ledger and does not
form part of the double entry,
• may include any of the following entries:
• often referred to as a memorandum ledger.
Trade Receivables account Receivables Ledger [Customer ….]
Balance b/f X Balance b/f X Balance b/f X
Credit sales less returns X Cash received X Credit sales less returns X Cash received X
Dishonoured cheques X Irrecoverable debts X Dishonoured cheques X Irrecoverable debts X
Refunds of credit bal. X Revenue [Discounts] X Refunds of credit bal. X Revenue [Discounts] X
Contra X Contra X
Balance c/f X Balance c/f X Balance c/f X
X X X X

Trade payables account: The payables ledger:
• is a listing of all transactions with each individual credit
• Is the nominal ledger, used to record transactions
Supplier
involving credit suppliers in total, and
• shows the total amount owed to that supplier at any point in
• The balance on this account at any time will be the time.
total amount owed by the business to all its credit • is separate to the nominal ledger, does not form part of the
suppliers. double-entry system
Trade Payables account • is maintained for record-keeping purposes only.
Balance b/f X Balance b/f X
Payables Ledger [Supplier ….]
Cash paid X Purchases less returns X
Balance b/f X
Purchase [Discounts] X Refunds of debit bal. X
Cash paid X Purchases less returns X
Contra X
Purchase [Discounts] X Refunds of debit bal. X
Balance c/f X Balance c/f X
Contra X
X X
Balance c/f X
X X
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Contra entries
The situation may arise where a customer is also a supplier, it may be agreed that there
is a contra of the balances i.e. balances are cancelled.
The double entry for this is:
Dr Trade Payables account
Cr Trade Receivables account
The individual accounts in the receivable ledgers and payable ledgers must also be
updated to reflect this.
Credit balances on the Trade receivables account

Sometimes the Trade receivables account may show a credit balance, i.e. we owe the
customer money. These amounts are usually small and arise when:
o The customer has overpaid.
o Credit notes have been issued when the goods have already been paid for.
o Payment is received in advance of raising invoices.
The Trade payables account may show a debit balance for similar reasons.
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Dishonoured cheques
A customer may pay us a cheque which we pay into our bank but the funds are not
sufficient in the customer’s account for the bank to make the transfer of funds. When
this is discovered by the business we need to reverse the receipt that was originally
recorded.
The double entry for clearing debtor balance when receiving the cheque:
o Dr Cash at bank
o Cr Trade Receivables account
The double entry for re-enter the debtor owing when the cheque is dishonored:
o Dr Trade Receivables account
o Cr Cash at bank
Reconciling to external documents

• In a computerised system, transactions entered into the Receivables Ledger of a
credit customer are automatically posted to the Trade Receivables Account in the
nominal ledger.
o No need to reconcile between the two.
o The same also applies to the Payable Ledger and the Trade Payables Account.
• It is only useful to verify that the records keeping are complete and accurate by
reconciling to external documents:
• The bank statement is A record of transactions on the business's bank account
maintained by the bank and is used as
(1) a source document and
(2) an external record
• Supplier statements are prepared by credit suppliers and sent on a regular basis, (end
of month or quarter) and list all transactions (invoices, returns, discounts and
payments) since the date of the previous statement.
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Supplier statement reconciliations

Approach to a reconciliation
o Match invoices and credit notes from the supplier statement and the payables ledger.
o Investigate any unmatched amounts.
o Consider whether differences are due to errors in
• The supplier statement
• The payables ledger
• Both.
o Any adjustments made to the payables ledger will also be updated in the nominal ledger.
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Supplier statement reconciliations
Supplier statement reconciliation £

Balance per supplier's statement XXX
Less: Early settlement discount not on statement (xxx)
Less: Returns in dispute not on statement (xxx)
Less: Payment not recorded by supplier (xxx)
Add: Invoice not on statement xxx
Balance per payables ledger XXX
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Bank reconciliations
Identifying debits and credits

A bank reconciliation is a statement agreeing the balance on the bank statement to
the balance on the cash account.
In theory at any time the balance in the cash account should equal balance on the bank
statement, however this is not normally the case for a number of reasons.
Note that debits and credits are reversed in the bank statement since the bank is
recording transactions from its point of view.
Bank credit: Bank debit:
o We have money o We owe money
o The bank has a liability to us o The bank has an asset as we owe the
money back
o A debit (asset) in our books o A credit (liability) in our books
o A credit (liability) in the banks’ books o A debit (asset) in the banks’ books
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Differences between the bank statement and the balance on our
cash ledger
There are three main reasons for differences:
Unrecorded items in cash ledger account
These are items which appear in the bank statement but have not yet been recorded
in the cash account, such as:
o interest
o bank charges
o dishonoured cheques
o standing orders and direct debits
o unmatched items.
These are not recorded in the cash account simply because the business often does
not know that these items have arisen until they see the bank statement.
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Timing differences
These items have been recorded in the cash account, but due to the bank clearing
process, have not yet been recorded in the bank statement:
o Outstanding/unpresented cheques (cheques sent to suppliers but not yet cleared by the
bank).
o Outstanding/uncleared lodgements (cheques received by the business but not yet cleared
by the bank).
Errors
The business may make a mistake when recording an item in the cash account.
The bank may make a mistake e.g. record a transaction relating to a different person
within our business bank statement.
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The bank reconciliation
Differences between the balance on the bank statement and the cash at bank account should
be identified and satisfactorily reconciled.
The cash at bank account should be updated/ corrected for:
 Errors in recording transactions
 Missing deposits or withdrawals from the bank account by way of debit card, standing order,
direct debit or online transfer.
 Bank interest and bank charges
 Dishonoured cheques (for administrative reasons that have nothing to do with a customer's
actual inability to pay its debt)
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The bank reconciliation
Bank reconciliation £ Notes

Balance per bank statement XXX
Cheques received by the business, debited to the cash at bank
Add: Uncleared lodgements xxx account, but not yet 'cleared' and entered by the bank.
Cheques paid out by the business and credited in the cash at bank
Less: Unpresented cheques (xxx) account which not yet presented to the bank, or 'cleared’ by the bank
Balance per corrected cash at bank account XXX
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Interactive question 1:
A bank reconciliation statement is being prepared. The closing balance shown by the bank statement is a
positive balance of £388. The cash at bank account has a positive balance of £106.
Requirements
 Using the table below, select the effect of each item on the closing balance shown by the bank statement.
 Adjust the cash at bank account and prepare the bank reconciliation.
Cash at Bank
Bank Statement (£)
Balance before adjustment
The bank has made a mistake in crediting the account with £110 belonging to
another customer – an error not yet rectified.
£120 received by the bank under a standing order arrangement has not been
entered in the cash at bank account.
Cheques totalling £5,629 have been drawn, entered in the cash at bank account
and sent out to suppliers but they have not been presented for payment.
Cheques totalling £5,577 have been received and entered in cash at bank
account but not yet credited in the bank statement.
Balance after adjustment
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Bank reconciliation £ Notes

Balance per bank statement
Add: Uncleared lodgements
Less: Unpresented cheques
Less: error
Balance per corrected cash at bank account
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Interactive question 2:
Tilfer’s bank statement shows £715 direct debits and £353 investment income which have not been
automatically recorded by the computerised accounting system and are therefore not included in the cash
at bank account. The bank statement does not show a customer’s cheque for £875 entered in the cash at
bank account on the last day of the reporting period. The cash at bank account has a credit balance of £610.
Requirement
What balance is shown on the bank statement?
£ £ Notes
The cash at bank account balance, before adjustment
Adjustment for:
Less direct debits
Add investment income
The cash at bank account balance, after adjustment
Less outstanding lodgement
The balance originally shown on the bank statement

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Reconciliation summary
VERIFICATION OF BALANCES
PAYABLES RECEIVABLES CASH
SUPPLIER PAYABLES BANK

CASH ACCOUNT
STATEMENTS ACCOUNT STATEMENT
SUPPLIER STATEMENT
BANK RECONCILIATIONS
RECONCILIATIONS
CUSTOMER CUSTOMER
STATEMENTS STATEMENTS
CUSTOMER STATEMENT
RECONCILIATIONS
• Adjustments to payables ledger • Unrecorded differences in cash account

• Relies on customer to
• Adjustments to supplier statement • Timing differences in bank statement
report discrepancies
• Adjustments to both • Errors in both
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Errors
There are five broad types of error as follows:
Error of omission = a transaction has been completely omitted from the accounting
records.
Error of commission = a transaction has been recorded in the wrong account but in the
right financial statement (e.g. motor expenses recorded as stationery).
Error of principle = a transaction has conceptually been recorded incorrectly (e.g.
debited as an expense rather than an asset).
Compensating error = two different errors have been made which cancel each other out.
Transposition error = the correct double entry has been made but two digits in the
amounts are recorded the wrong way round.
Accounting Errors and suspense accounts
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Errors
Approach to questions
A good approach is to consider:
1. Identify the original incorrect entry (what did the business do?)
2. Identify what the entry should have been (what should the business have done?)
3. Create a correcting journal entry (what does the business need to do now?)
Always assume that if one side of the double entry is not mentioned, it has been
recorded correctly
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Interactive question 3
The journal entries which would correct these errors: Type of Debit to Credit to
error
A business received an invoice for £250 from a supplier which it

omitted from its accounting records entirely.
Repairs worth £150 were incorrectly debited to the non-current

asset (machinery) account instead of the repairs account.
The bookkeeper of a business reduced cash sales by £280

because he was not sure what the £280 represented. In fact, it
was drawings.
Telephone expenses of £540 were incorrectly debited to the
electricity account.
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Suspense accounts
 A suspense account is a temporary account which allows a transaction to be recorded
in the accounting system, even though the ledger account for one side of the
transaction is not yet confirmed.
 Could be automated by the accounting system or manually created by bookkeeper.
 The suspense account must be cleared before the financial statements can be
prepared.
 Approach to questions
Where a suspense account has been setup, take the did do/should do/to correct
approach as before:
o The ‘did do’ will contain an entry to the suspense account.
o Part of the correction journal will be to reverse this suspense account entry.
o The correction journal must always include an equal debit and credit.
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Adjustments to profit
The correction journal may result in a change in profit, depending on whether the
journal debits or credits the statement of profit or loss:
Dr Statement of financial position account

No impact to profit
Cr Statement of financial position account
Dr Statement of profit or loss

No impact to profit
Cr Statement of profit or loss
Dr Statement of profit or loss

Profit decreases
Cr Statement of financial position account
Dr Statement of financial position account

Profit increases
Cr Statement of profit or loss
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Adjustments to profit
Adjustment to Profit
Increase Decrease
£ £ £
Draft profit X
Adjustments:
1 X
2 X
3 X
––– –––
X X X/(X)
––––
Revised profit X
––––
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Interactive question 4: Errors
Down & Co has the following errors and Prepare journal entries to correct each of the
omissions in its accounting records: above errors. Narratives are not required.
(1) Debit Trade Receivables 1,000
(1) A sale of goods on credit for £1,000 has
not been recorded. Credit Sales 1,000
(2) Delivery costs of £240 on a new item of (2) Debit NCA-Plant 240
plant has been recorded as revenue Credit Distribution cost 240
expenditure in the distribution costs
account.
(3) Cash discount of £150 had been taken (3) Debit Purchase 150
on paying a supplier, JW, even though the Credit Payables 150
payment was made outside the time limit.
JW is insisting that £150 is still payable.
(4) A raw materials purchase of £350 (on (4) Debit Trade Payables: 500
credit) has been recorded as £850.
Credit Purchase: 500
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Interactive question 4: Continue

Before the errors were corrected, Down & Co’s gross profit was calculated at £35,750 and the net
profit for the year at £18,500. Calculate the revised gross and net profit figures after correction of
the errors.
• Prepare journal entries to correct each of the above errors.
Gross profit Net profit Narratives are not required.
(£) (£)
Balance before adjustment
Adjustment for:
(1) Credit sales
(2) Distribution cost
(3) Purchase
(4) Purchase
Balance after adjustment
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Adjusting the initial trial balance for errors

The initial trial balance can be adjusted for errors (and period end adjustments) that come to
light after the initial trial balance has been extracted.
Ledger account Initial Trial Balance Adjustments Final Trial Balance

Debit (£) Credit (£) Debit (£) Credit (£) Debit (£) Credit (£)
Cash at bank
Capital
Loan
Non-current assets
Trade payables
Expenses
Purchases
Total
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IMPACT OF CORRECTION JOURNALS ON PROFITS
Dr Statement of financial position, Cr Statement of financial position No impact to profit

Dr Statement of profit or loss, Cr Statement of profit or loss No impact to profit
Dr Statement of profit or loss, Cr Statement of financial position Profit decreases
Dr Statement of financial position, Cr Statement of profit or loss Profit increases
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Accounting
CHAPTER 7
Cost of sales and

Inventories
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1. IAS 2, Inventories (FRS 102 s13)
 Record and account for
2. Cost of sales transactions and events resulting in
income, expenses, assets, liabilities
3. Accounting for opening and and
closing inventories
 Identify the main components of a
4. Adjusting the initial trial balance set of financial statements and
specify their purpose and
5. Counting inventories interrelationship
6. Valuing inventories  Prepare and present a statement of
financial position, statement of profit
7. Using mark-up/margin or loss, statement of changes in equity
percentages to establish cost
and statement of cash flows (or
8. Inventory drawings extracts)
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Inventories
Are those assets:
 held for sale in the ordinary course of business;
o goods purchased and held for resale
o finished goods
 in the process of production for such sale;
o work in progress (part completed goods)
 in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
o raw materials awaiting use
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Cost of sales
£ • Opening inventory is:
Opening inventory X • the closing inventory from the previous period
• part of this period’s cost of sales (as it should be sold
Purchases X
this year)
Delivery inwards X • Closing inventory
Closing inventory (x) • These are goods which have been purchased but not
yet sold.
Cost of sales x
• Under the accruals concept, the cost of these goods
should not be included in cost of sales as they have
not contributed to revenue generation.
• Delivery inwards
• The amount paid by a business for having the goods
delivered to it.
• The cost of sales is deducted from revenue to arise at the
business’s gross profit.
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Interactive question 1: Gross profit
• On 1 January 20X6, Grand Union Food Stores had £ £

goods in inventory valued at £6,000. During 20X6 Revenue
it purchased supplies costing £50,000. Sales for
Opening inventory
the year to 31 December 20X6 amounted to
£80,000. The cost of goods in inventory at 31 Purchases
December 20X6 was £12,500. Delivery inwards
Requirement : Closing inventory
Cost of sales
• Calculate Grand Union Food Stores’ gross profit
Gross profit
for the year.
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Accounting for inventory

Opening inventory is included in cost of sales £ £
DEBIT Cost of sales X
CREDIT Current assets – inventory X
Closing inventory is deducted from cost of sales

DEBIT Current assets – inventory X
CREDIT Cost of sales X
The inventory account is only used at the end of a reporting period, when the business
counts and values closing inventory:
 The inventory count establishes quantities held in inventory by extracting an inventory
listing from the computerised accounting system and a physical count takes place to
verify the accuracy and completeness of the listing.
 The valuation is the lower of (historical) cost of purchase, and net realisable value (NRV).
Accounting Inventory
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Counting & Valuing inventory

Counting inventories Valuing inventories
• it is necessary to ‘freeze’ the activity of a • In accordance with IAS 2, inventory should
business so as to determine the quantities of be valued at the lower of cost and net
inventories held. realisable value.
• In very small businesses, quantities of
inventories held at the date of the statement of
• NRV is the expected selling price less any
financial position can be determined by costs to be incurred in achieving that sale.
physically counting - an inventory count.
• Cost comprises:
• It is more likely, that a business will hold
considerable quantities of varied inventory and  purchase price,
will use its computerised accounting system to
maintain continuous inventory records.
 Delivery inwards,
 A few inventory line items are counted  import taxes and duties, and
each day,
 conversion costs to bring the item to
 this is called a ‘continuous’ count because its present location and condition.
it is spread out over the reporting period.
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Interactive question 4
The following figures relate to inventory Item A B C
held at the end of the reporting period. £ £ £
Cost
Item A B C NRV
£ £ £
Value of unit
Cost 20 9 14
Units held
Selling price 30 12 22
Value of inventory
Modification cost to enable sale 0 2 8
Selling costs 7 2 2
Journal entry £ £
Units held 200 150 300
Debit
Calculate the value of inventory and write Credit

the journal for inclusion in the financial
statements.
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Accounting for opening and closing inventories
Inventory Cost of Sales (trading)

£ £
£ £
Inventory (opening) Xxx
Balance b/d Xxx CoS (Opening Inv) Xxx
Purchase Xxx Inventory (closing) Xxx
CoS (Closing Inv) xxx Balance c/d Xxx
Xxx Xxx Carriage Inward Xxx Loss (Ins.claim) Xxx
Balance b/d Xxx Profit & Loss a/c Xxx
Xxx Xxx
Notes:
 There is neither Goods Inputted nor Goods Outputted in the Inventory account.
 Purchased goods are supposed to be sold in the same period of receiving.
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Conversion costs – Cost of manufacturing goods

Any costs involved in converting raw materials into final product, including:
 labour,
 expenses directly related to the product and
 an appropriate share of production overheads (but not sales, administrative or general
overheads).
Cost of Sales (manufacturing)

£ £
Purchase Xxx
Import taxes and duties Xxx Inventory-CoMG (closing) Xxx
Conversion costs (labor & OH) Xxx Loss (Ins.claim) Xxx
Carriage Inward Xxx Profit & Loss a/c Xxx
Xxx Xxx
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Unit price applied for inventory
There are several techniques used in practice to attribute a cost to interchangeable inventory items, which
were issued for consumption
INVENTORY
FIFO AVCO LIFO
• Items are assumed to be used in • Each item at any moment is • Items issued are assumed to be
the order in which they are assumed to have been purchased part of the most recent delivery,
received from suppliers, at the average price of all the • oldest consignments are
• so oldest items are issued first. items together, assumed to remain in the stores
• Inventory remaining is the newer • so inventory remaining is valued • LIFO is not allowed under IFRS
items at the most recent average price. Standards
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Interactive question 5: FIFO
A firm has the following transactions with respect to its product Red. It has no opening inventory
at the start of the period.
Requirements
Using FIFO, calculate the following
for both Year 1 and Year 2:
• closing inventory
• sales
• cost of sales
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Units Unit cost Value Notes

Year 1
Sales
Opening Inventory
Total purchases
Closing Inventory
Cost of sales
Gross profit
Year 2
Sales
Opening Inventory
Total purchases
Closing Inventory
Cost of sales
Gross profit
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Inventory valuations and profit

Cost of Sales (trading)
£ £
Inventory Xxx
(opening)
Profit & Loss a/c
Purchase Xxx
£ £
Carriage Inward Xxx Inventory Xxx
(closing) Revenue Xxx
Loss (Ins.claim) Xxx CoS Xxx
Profit & Loss a/c Xxx Gross Profit c/d
xxx xxx
Gross Profit b/d
Expenses Xxx Other Inc. Xxx
Capital a/c (Profit) Xxx Capital a/c (Loss) Xxx
Xxx Xxx
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Drawings of inventory
It is not unusual for a sole trader to take
inventory from his business for his own use.
This is a form of drawings.
The correct double entry to record such Cost of Sales (trading)

drawings is: £ £
Dr Drawings –
Cr Purchases –
Purchase Xxx
The credit entry ensures that the cost of Carriage Inward Xxx Inventory (closing) Xxx
inventory taken is not included as part of the
cost of inventory sold in the statement of Loss (Ins.claim) Xxx
profit or loss.
Drawings Xxx
Profit & Loss a/c Xxx
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Using mark-up/margin percentages to establish cost

o Mark-up is calculated on cost.
o Margin is calculated on sales.
o Margin and mark-up can help us to establish the cost of an item of inventory.
Margin Mark-up
% £ % £
Sales 100% 100 140% 100
Cost 60% 60 100% 71.4
40% of cost
Gross Profit 40% of sales 40 28.6
28.6% of sales
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Adjusting trial balance for inventories

Initial Trial balance Adjustment Final Trial balance
Debit Credit Debit Credit Debit Credit
(1) (2) (3) (4) (5) (6) (7)
Accounts with debit Xxx xxx xxx (2) + (4) – (5)
balance If result >0, input If result <0, input
here here
Accounts with credit Xxx xxx xxx (3) + (5) – (4)

balance If result <0, input If result >0, input
here here
Inventory Opening Transfer closing Transfer opening Closing bal xxx

bal xxx bal from COS bal to COS
xxx xxx
Purchase xxx Transfer to COS Nil

xxx
Cost of sales Nil Nil Opening Inv Closing Inv
xxx xxx Xxx
Purchase
xxx
XXX XXX XXX XXX XXX XXX
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Chapter summary
INVENTORY
VALUATION OF COST STRUCTURES

WRITE OFF OF
INVENTORY Gross profit margin
INVENTORY
= lower of Mark-up on cost
NET REALISABLE
COST
VALUE
o FIFO GOODS STILL IN GOODS NOT IN

o AVCO INVENTORY INVENTORY
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Accounting
CHAPTER 8
Irrecoverable debts and

the allowance for receivables
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Outcome
Upon completion of this chapter, you will be able to:
o determine the cost of a non-current asset
o explain the purpose of depreciation
o calculate depreciation charges
o account for depreciation
o calculate the depreciation charge after a change in residual value, change in
depreciation method or change in useful life
o account for the disposal of non-current assets
o account for the impairment of non-current assets
o explain the entries in a non-current asset register
o explain what is meant by intangible non-current assets
o explain the nature of amortisation
o account for intangible non-current assets.
Accounting Non-current assets and depreciation
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1. Irrecoverable debts
2. The allowance for receivables  Record and account for transactions

and events in accordance with the
3. Accounting for irrecoverable
appropriate basis of accounting and the
debts and the allowance for laws, regulations and accounting
receivables standards
4. Adjusting the initial trial balance
for irrecoverable debts and the
allowance for receivables
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Overview
RECEIVABLES
PAY ACCORDING TO MAY NOT PAY WILL NOT PAY

THE TERMS OF THE
CREDIT AGREEMENT
DOUBTFUL IRRECOVERABLE
RECEIVABLE DEBT
ALLOWANCE FOR WRITE OFF

RECEIVABLES
IRRECOVERABLE
DEBT RECOVERED
Accounting Irrecoverable debts and allowances
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Irrecoverable debts
An irrecoverable debt is a debt which

the business believes will never be paid.
Indications that this is the case may

include:
o the bankruptcy of the customer
o the disappearance of the customer
o an outright refusal to pay.
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Irrecoverable debts
Definitions Writing off: Charging the cost of the debt against
the profit for the period.
Irrecoverable debt: A debt which is not
expected to be paid. Debit Irrecoverable debts expense £X
Credit Trade receivables (SFP) £X
Irrecoverable debts expense is shown as
an administrative expense
Do NOT automatically treat a An irrecoverable debt which has been written off
dishonoured payment as an might be unexpectedly paid.
irrecoverable debt
Debit Cash at bank £X
Credit Irrecoverable debts expense £X
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The allowance for receivables

Allowance for receivables: An amount in • When an allowance for receivables is first
relation to the probability of the non- made:
recovery of debts that reduces the Debit Irrecoverable debts expense £X
receivables asset to its prudent
Credit Allowance for receivables (SFP) £X
valuation in the SFP.
• When an allowance for receivables already
The allowance is a separate account exists but is subsequently increased:
which is offset against trade receivables,
which are shown at the net amount. Debit Irrecoverable debts expense £X
Credit Allowance for receivables (SFP) £X
£
Trade Receivables balance Xxx • When an allowance for receivables already
exists but is subsequently reduced
Allowances for Receivables bal (xxx)
Carrying amount of T.R.L in SFP XXX Debit Allowance for receivables (SFP) £X
Credit Irrecoverable debts expense £X
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Doubtful receivables
Calculation of the allowance for receivables
The allowance for receivables is calculated after all irrecoverable debts have been
written off.
In the exam, if you are required to calculate an allowance for receivables, you will be
provided with the probability of non-payment and should use this to calculate the
required allowance for receivables.
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Accounting for Irrecoverable Debts

Trade Receivables Ledger a/c
£ £
Balance b/d Xxx
Sales (on credit) Xxx
Cash Xxx I.D.E a/c Xxx
(Dishonored (debts written off) Irrecoverable Debts Expenses a/c
cheques) £ £
Balance c/d Xxx T.R.L a/c Xxx
Xxx Xxx Allowances for Xxx Allowances for Xxx
Balance b/d Xxx receivables receivables
Allowances for Receivables a/c Xxx Cash (debts Xxx

previous written
£ £ off)
Balance b/d BBB Profit & Loss a/c Xxx
I.D.E a/c Xxx I.D.E a/c Xxx Xxx Xxx
(BBB-CCC) (CCC-BBB)
Balance c/d CCC  The balance c/d is calculated first
Xxx Xxx  By taking T.R.L balance c/d * the probability of non-
recovery
Balance b/d Xxx
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Doubtful receivables
Approach to questions
o Insert brought forward balances for receivables (debit) and the allowance (credit).
o Write off irrecoverable debts.
o Record the recovery of irrecoverable debts.
o Close off the receivables account to obtain closing balance.
o Calculate and post the required movement to the allowance for receivables.
o Close allowance and expense accounts.
Allowances for receivables are calculated at the end of every year.
Please be noted that any difference between the allowance at the start of the year and
the allowance at the end of the year is charged/credited to the statement of profit or
loss.
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Interactive question 1: Irrecoverable debts written off

At 1 October 20X5 a business had total outstanding debts of £8,600. During the 12-month reporting period to
30 September 20X6 the following transactions took place:
(1) Credit sales £44,000.
(2) Payments from credit customers £49,000.
(3) Two debts, for £180 and £420, were declared irrecoverable and the customers are no longer
purchasing goods from the company. These are to be written off.
Requirement:
Prepare the trade receivables account and the irrecoverable debts expense account for the reporting period.
Trade Receivables Ledger a/c Irrecoverable Debts Expenses a/c

£ £ £ £
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Interactive question 2: Allowance for receivables

Shown below are the outstanding trade receivables and the probability of non-payment of
those trade receivables at the end of each reporting period.
Requirement
For each of the three reporting periods:
(1) Calculate the amount of the allowance for receivables.
(2) Calculate the charge or credit required to the statement of profit or loss.
(3) Calculate the carrying amount of trade receivables that should be presented in the
statement of financial position.
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ALLOWANCE FOR RECEIVABLES a/c Irrecoverable Debts Expenses a/c

£ £ £ £
20x6
20x7
Statement of financial position:

20X6 20X7 20X8
(extract as at 28 February)
Current assets
Allowance for rec
Trade receivables
(net of allowance for receivables)
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Adjusting the initial trial balance for irrecoverable debts and the
allowance for receivables
The decisions about irrecoverable debts and allowances for receivables are usually made
and accounted for after the initial trial balance has been extracted, the adjusting the initial
trial balance using the columnar approach can be used here.
• Calculate the amount of irrecoverable debts expense and the required allowance for
receivables.
• Prepare the journal entries to record the expense and the allowance.
• Enter these journal entries in the adjustments columns of the trial balance, opening new
lines for irrecoverable debts expense and the allowance for receivables if necessary.
• Add across to prepare the final trial balance.
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Adjusting trial balance for Irrecoverable debts

Initial T. balance Adjustment Final Trial balance
(1) (2) (3) (4) (5) (6) (7)
Trade Receivables Xxx Debts written off

xxx Xxx
Allowance for Allowance Allowance Closing balance

receivables decreased increased calculated
BBB-CCC CCC-BBB CCC
Irrecoverable Debts Debts written off I.D previously
expenses Xxx written off now
recovered xxx
Allowance Allowance
increased decreased Closing bal
CCC-BBB BBB-CCC xxx
Cash at bank Xxx I.D previously
written off now
recovered xxx Xxx
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Interactive question 2: continue

Present the figures of the year ended 28 Feb 20X7 in the extended trial balance provided below
Initial T. balance Adjustment Final Trial balance

(1) (2) (3) (4) (5) (6) (7)
Trade Receivables
Allowance for
receivables
Irrecoverable Debts
expenses
Cash at bank
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Chapter summary
RECEIVABLES
Dr Receivables
Cr Sales
PAY ACCORDING TO THE TERMS

MAY NOT PAY WILL NOT PAY
OF THE CREDIT AGREEMENT
Dr Cash
Cr Receivables
DOUBTFUL RECEIVABLE IRRECOVERABLE DEBT
ALLOWANCE FOR RECEIVABLES WRITE OFF

Reverse opening balance and account Dr Irrecoverable debt expense
for closing balance Cr Receivables
IRRECOVERABLE DEBT
OPENING ALLOWANCE CLOSING ALLOWANCE
Dr Allowance for receivables Dr Irrecoverable debt expense
RECOVERED
Cr Irrecoverable debt expense Cr Allowance for receivables Dr Cash
Cr Irrecoverable debt expense
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Accounting
CHAPTER 9
Accruals and
prepayments
Trần Lê Na
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Learning topics & outcome
1. The principle behind accruals and

prepayments
2. Accruals
Record and account for transactions and
3. Prepayments (prepaid expenses)
events in accordance with the appropriate
basis of accounting and the laws,
4. Accounting for accruals and
regulations and accounting standards
prepayments applicable to the financial statements
5. The accrual principle and income
6. Accruals, prepayments, advances

and arrears and the trial balance
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The principle behind accruals and prepayments

Definitions
Accruals (accrued expenses): Expenses which are charged against the profit for a particular period,
even though they have not yet been paid for.
Prepayments (prepaid expenses): Expenses which have been paid in one reporting period but are
not charged against profit until a later period, because they relate to that later period.
Accruals and prepayments are the means by which we move expenses into the correct reporting
period.
• If we pay in this period for goods/services that relate to the next reporting period, we use a
prepayment to transfer that expense forward to the next period.
• If we have incurred an expense in this period which will not be paid for until the next period, we use
an accrual to bring the expense back into this period.
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Accounting for Accruals

Cash at bank a/c
£ £
AAA expense AA0
AAA Expense
AAA expense 00A £ £
Cash at bank AA0
Accrual 00A
Accrual a/c Profit & Loss a/c AAA
£ £
Accrual 00A
AAA expense 00A
Cash at bank 00A
Balance c/d 00A
00A 00A
Balance b/d 00A
AAA Expense 00A
Balance c/d Nil
00A 00A
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Interactive question 1: Accruals 1

Cleverley started in business as a paper plate and cup manufacturer
on 1 January 20X2, preparing financial statements to 31 December
20X2. He is not registered for VAT. Electricity bills received in
respect of charges for the previous quarter were as follows:
Requirement: What is the electricity expense for the year ended 31

December 20X2? Prepare a journal entry to record the accrual as at
31 December 20X2.
Electricity Expense
Year 20x2 Month # £ £
Cash at bank
Cash at bank
Cash at bank
Accrual
Profit & Loss a/c
Year 20x3 Accrual
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Accounting for Prepayments
Cash at bank a/c

£ £
PPP PPPP PPP Expense
expense £ £
Cash at bank PPPP
Prepayment 00P
PPP 0PP Prepayment a/c
P&L a/c PPP
expense £ £
Prepayment 00P Balance b/d Nil
Cash at bank 0PP PPP expense 00P
P&L a/c PPP Balance c/d 00P

00P 00P
Balance b/d 00P
PPP 00P
Expense
Balance c/d Nil
00P 00P
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Worked example: Prepayments 1

A business opens on 1 January 20X4 in a shop where the rent is
£20,000 per year, payable quarterly in advance at the beginning
of each three month period. Payments were made as in the
attached table.
Requirement : What is the rental expense for the year ended 31
December 20X4?
Rent Expense
Year 20x4 Month # £ £
Cash at bank
Cash at bank
Cash at bank
Cash at bank Profit & Loss a/c
Prepayment a/c
Year 20x5
Prepayment a/c
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Further notes about Accruals and Prepayments

 Prepayments are included in current Prepayments and accruals must be
assets in the SFP as
reversed by an opening journal in the new
 they represent goods or services that period, otherwise
have been paid in the year but relate to
 the entity will charge itself twice for the
future accounting periods
same expense (accruals) or
 They usually clear within 12 months of
the date of the SFP.  will never charge itself (prepayments).
Once these opening journals are
 Accruals are included in current liabilities processed, the balance on the accruals
 they represent expenses which have and prepayments accounts will be zero.
been incurred but for which no invoice
Most computerised accounting systems
has yet been received.
allow you to set up special journals called
 They nearly always clear soon after the reversing journals which are flagged to
end of the reporting period. automatically be reversed by the system
after a specific date.
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Accruals basis of accounting
Accruals and prepayments

Cash paid for expenses does not equal Expenses relating to
during the period the period
ADJUSTMENT
NEEDED?
We have incurred an We have paid for an
expense but not yet paid for expense in advance (i.e.
it at the year end relates to next year)
Need to record the extra Need to reduce the expense

expense at year end by at the year end by making a
making an ACCRUAL PREPAYMENT
Dr Expense (SPL) Dr Prepayments (SFP)

Cr Accruals (SFP) Cr Expense (SPL)
Accounting Cost of sales, accruals and prepayments
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Interactive question 2: Accruals 2

Snuffer is a business dealing in pest control. Its owner, Robert Dent, employs a team of eight people who were paid
£12,000 per annum each in the year to 31 December 20X5. At the start of 20X6 he raised salaries by 10% to £13,200 per
annum each.
On 1 July 20X6, he hired a trainee at a salary of £8,400 per annum.
He pays his work force on the first working day of every month, one month in arrears, so that his employees receive their
salary for January on the first working day in February, etc.
Requirements
2.1 Calculate the cost of salaries charged in Snuffer’s statement of profit or loss for the year ended 31 December 20X6.
2.2 Calculate the amount actually paid in salaries during the year (ie, the amount of cash received by the work force).
2.3 State the amount of the accrual for salaries which will appear in Snuffer’s statement of financial position as at 31
December 20X6.
Description Working 1 Cost of Working 2 Amount Amount

salaries paid accrued
(2.1) (2.2) (2.3)
8 employees
1 trainee
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Interactive question 3: Accruals and prepayments

The Batley Print Shop, which is not registered for VAT, rents a photocopying machine. It makes a quarterly payment as
follows:
(1) three months rental in advance
(2) a charge of 2 pence per copy made during the quarter just ended
The rental agreement began on 1 August 20X4. The first six quarterly bills were as follows:
Requirements
3.1 Calculate the charge for photocopying expenses for the year to 31 August 20X4 and the amount of prepayments and/or
accrued charges as at that date.
3.2 Calculate the charge for photocopying expenses for the following year to 31 August 20X5, and the amount of
prepayments and/or accrued charges as at that date.
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Description Working Amount Working Amount Accruals Prepay-

charged paid ments
SPL SFP-CL SFP-CA
Year to 31 Aug. 20X4
Rental fee
Copying charge
Year to 31 Aug. 20X5

Rental fee
Copying charge
Photocopying Expense
Year 20x4 Month # £ Month # £
Year 20x5
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Details of working in
excel file
The following information is available:

(1) Closing inventory at 30 September 20X8 is £13,000, after writing off damaged goods of £2,000.
(2) Included in administrative expenses is machinery rental of £6,000 covering the year to 31 December 20X8.
(3) A late invoice for £12,000 covering rent for the year ended 30 June 20X9 has not been included in the trial balance.
Requirement : Prepare a statement of profit or loss and statement of financial position for the year ended 30 September 20X8.
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Interactive question 5: Administrative expenses account
Xbat has recorded expenses incurred on credit totalling £10,500 to its administrative
expenses ledger account during 20X2, and expenses paid in cash of £250. At 31 December
20X2 the business estimates that the year-end accrual should be £100 less than the accrual
brought forward, and the prepayment should be £150 less.
Requirement :
What is the total cost of administrative expenses in the year ended 31 December 20X2?
Accruals a/c Prepayment a/c
Year 20x2 £ £ Year 20x2 £ £
Administrative Expenses
Year 20x2 workings £ workings £
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The accrual principle and income

Accrued income arises when receipt of income (such as rent or subscription) is in arrears at the end of the
reporting period.
 Cash may be received in one period in relation to an event which arose in a previous period.
 The accrued income is a current asset on the SFP.
Deferred income arises when income has been received in advance at the end of the reporting period.
 Cash may be received in one period although the actual sale to which it relates occurs in the subsequent period.
 An example is a deposit (or advance payment, or payment on account) received from a customer on an item
which will be delivered in the future.
 The deferred income is a current liability in the SFP.
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Accounting for Accrued Income

Cash at bank a/c
£ £
AAA Income 0AA
AAA Income
£ £
Cash at bank 0AA

AAA Income AAAA
Accrued Income 00A
P&L a/c AAA
Accrued Income 00A Accrued Income a/c [Assets in SFP]
Cash at bank AAAA

£ £
Balance b/d Nil
P&L a/c AAA
AAA Income 00A
Balance c/d 00A
The treatment is as follows: 00A 00A
• Calculate the amount of the deferred or accrued income. Balance b/d 00A
• Prepare a journal entry at the end of the reporting period. AAA Income 00A
• At the beginning of the next reporting period, reverse the
Balance c/d Nil
journal entry.
00A 00A
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Accounting for Deferred Income
DDD Income
Cash at bank a/c
£ £ £ £
Cash at DDDD DDD Income DDDD
bank
Deferred Income a/c [CL in SFP]
P&L a/c DDD
£ £
Deferred 00D DDD Income 0DD
Balance b/d Nil Income
DDD 00D Deferred xxD
Income Income
Balance c/d 00D Cash at 0DD
00D 00D bank
Balance b/d 00D P&L a/c DDD
DDD Income 00D
Balance c/d Nil
00D 00D
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Accrued income and deferred income
ADJUSTMENT NEEDED?
Deferred income Accrued income
Income received in advance that Income earned during the

relates to next period period but not yet received
Needs to be removed from the Needs to be included in the

statement of profit or loss statement of profit or loss
Dr Income (SPL) Dr Accrued income (SFP)

Cr Deferred income (SFP) Cr Income (SPL)
Accounting Cost of sales, accruals and prepayments
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Subscriptions to clubs or associations

Clubs or associations do not generally maintain a receivables ledger and so just use cash accounting.
Some members pay an annual subscription earlier than they need to (in advance), and others pay
late (in arrears).
At the end of the year, the club will need to make sure that the income figure relating only to the
actual reporting period. The treatment is as follows.
• Open a subscriptions receivable ledger account.
• Enter all the amounts you know eg, annual income or cash received.
• Calculate the balancing figure – in an exam the balancing figure will be the amount you are
looking for. SUBSCRIPTIONS RECEIVABLE
£ £
Opening arrears Xxx Opening advances Xxx
Cash received in year Xxx
Annual income Xxx Irrecoverable amounts Xxx
Closing advances xxx Closing arrears Xxx
xxx xxx
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Interactive question 6: Accrued income

The Drones Club has a reporting period of 12 months to 30 June. Its annual subscription for the year ended 30
June 20X7 was £100, and this rose to £120 per annum for the year to 30 June 20X8. As at 1 July 20X6 the
Club’s members had paid £2,380 in advance and were £4,840 in arrears. The Club only has 200 members, and
there are no irrecoverable amounts. It received £23,620 in respect of subscriptions in the year to 30 June
20X7, and four members are known to be in arrears at 30 June 20X7.
Note: The Drones Club decided that from 1 July 20X6 they will no longer accept any part payment of
subscriptions. This did not affect the collection of arrears.
Requirement
How many members have paid their subscriptions for the reporting period ended 30 June 20X8 in advance?
SUBSCRIPTIONS RECEIVABLE
Y/e 30 Jun 20x7 workings £ workings £
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Accruals, prepayments, advances and arrears

and the trial balance
Accruals, prepayments, advances and arrears at the period end are usually calculated and accounted for as
adjustments after the initial trial balance has been extracted.
Accruals and prepayments are processed as adjustments against the initial trial balance by using
adjustments columns.
• Calculate the amounts of the accrued and prepaid expenses, and the deferred or accrued income.
• Prepare the period-end journals.
• Enter these journals in the adjustments columns against the initial trial balance.
o Accrued expenses will be recorded in the adjustments column, as a debit to the expenses line (SPL)
and a credit to a new accruals line (SFP).
o For prepaid expenses: debit a new prepayments line (SFP) and credit the relevant expenses line
(SPL).
o Add across (cross cast) to prepare the final trial balance.
• Enter the closing journals in the ledger accounts.
• Prepare and enter the opening journals to reverse the accruals and prepayments.
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Adjusting on the Trial Balance

(1) (2) (3) (4) (5) (6) (7)
Prepayment Xxx PPP Xxx
Accrual Xxx AAA Xxx
Accrued Income Xxx AAA Xxx
Deferred Income Xxx DDD Xxx
Expense Xxx AAA PPP Xxx
Income Xxx DDD AAA Xxx

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Accounting
CHAPTER 10
Non-current assets and

depreciation
Trần Lê Na
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1. Tangible non-current assets and
depreciation (IAS 16) (FRS 102 s17)
2. The objective of depreciation
3. Calculating depreciation
4. Accounting for depreciation Record and account for transactions and

5. Impairment (IAS 36, Impairment of events in accordance with the appropriate
Assets) basis of accounting and the laws,
regulations and accounting standards
6. Non-current asset disposals applicable to the financial statements
7. The asset register
8. Intangible non-current assets
9. The non-current assets note to the

statement of financial position
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Tangible non-current assets and depreciation

Non-current assets are assets that have a useful life that extends beyond one reporting period.
• Non-current assets may be tangible or intangible.
o Tangible non-current assets are known as property, plant and equipment (PPE).
• The cost of an item of PPE includes the directly attributable costs bringing the asset to the
location and condition necessary for it to be capable of operating
o purchase price;
o delivery costs;
o taxes and duties;
o irrecoverable VAT;
o installation and assembly costs;
o professional fees;
o testing costs.
• Subsequent capital expenditure may be added to the cost of an item of PPE provided
o the expenditure enhances or
o restores any benefits consumed.
• All tangible non-current assets except freehold land, have a finite useful life.
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IAS 16, Property, Plant and Equipment

The objective of IAS 16 is to prescribe in relation to PPE the accounting treatment for:
 the recognition of assets
 the determination of their carrying amounts
 the depreciation charges relating to them
UK GAAP alert! There are no material differences between IAS 16 and FRS 102.
The cost of an item of PPE includes the directly attributable costs bringing the asset to the location and condition
necessary for it to be capable of operating
o purchase price;
o delivery costs;
o taxes and duties; irrecoverable VAT;
o installation and assembly costs;
o professional fees;
o testing costs.
• Subsequent capital expenditure may be added to the cost of an item of PPE provided
o the expenditure enhances or
o restores any benefits consumed.
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Paying for PPE: A business might purchase a Useful life: The estimated economic life
new item of PPE: (rather than the potential physical life) of an
o for cash or item of PPE to the business.
o on credit,  The economic life of the asset will be
o or in part-exchange. The supplier of the determined by such factors as technological
new asset agrees to take the old asset and progress and changes in demand.
gives the buyer a reduction in the
 The only freehold land is deemed to have
purchase price of the new asset.
an unlimited useful life, All other tangible
Context example: A business purchases a assets have a finite useful life and will be
new delivery van, trading in an old van in part- depreciated over that useful life.
exchange.
 The cost of the new van is £25,000 and  Determining the useful life of PPE is a
matter of judgement.
 the part-exchange value of the old van is
£10,000,  consider the useful life of similar assets
 what is normal for the industry and
 so the business will pay the van dealer
£15,000.  the entity’s future plans for the asset.
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Depreciation: The systematic
allocation of the cost of an asset,
less its residual value, over its useful
life.
Depreciation represents the
consumption of non-current assets Residual value: The estimated amount that
during the reporting period. the entity would obtain from disposing of
To calculate the depreciation charge the asset at the end of its useful life, after
deducting estimated disposal costs.
for a reporting period, the following
factors are relevant:
• asset cost
• useful life
• asset residual value
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Interactive question 1: Depreciable amount
Arundel Enterprises purchased a new car for a sales representative. The invoice received contained the
following information:
It is estimated that the new car will have a useful life of three years and will have a residual value of £6,360.
Requirement: Calculate the total amount to be depreciated in respect of the new car.
£
Cost of the car
Residual value
Total amount to be depreciated
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The objective of depreciation

Depreciation arises from the application of the accrual principle.
The asset contributes to the generation of income over a number of reporting periods it
would be appropriate to charge the costs over those periods.
Common depreciation misconceptions

 It does not reflect the fall in value of an asset over its life.
 It is not ‘setting aside money’ to replace the asset at the end of its useful life. As some
assets were not going to be replaced, there costs should still be allocated over the
useful life.
Definitions:
 Carrying amount: Cost less accumulated depreciation less accumulated impairment
losses.
 Accumulated depreciation: The total amount of the asset’s depreciation amount that
has been allocated to reporting periods to date.
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Methods of depreciation
Straight line depreciation: Reducing balance depreciation:
 The depreciable amount (cost less residual  The annual depreciation charge
value) is charged in equal instalments to each = fixed % * carrying amount b/f of the
reporting period over the useful life of the asset.
asset.
 It might be used to allocate a greater
 The carrying amount of the non-current proportion of the total depreciable amount
asset declines at a steady rate, or in a to the asset’s earlier years and a lower
‘straight line’ over time. proportion to its later years, as the benefits
 The annual depreciation charge obtained by the business from using the
asset decline over time
=  In the exam you will
( )
 The monthly depreciation charge  NOT be concerned with the asset’s
residual value
=  nor how to calculate the percentage
∗
 it is often convenient to state that  not have to calculate the depreciation
depreciation is charged at a percentage per charged monthly.
annum on the asset’s depreciable amount
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Interactive question 2: Depreciation

A lorry bought for a business cost £17,000 plus VAT at 20%. It is expected to last for five years and then
to be sold for £2,000 plus VAT.
Work out the depreciation to be charged to each 12-month reporting period under:
Requirements
2.1 the straight line method
2.2 the reducing balance method, using a rate of 35%
Year Working Straight- Working Reducing

line (£) balance (£)
1
2
3
4
5
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Accounting for depreciation

Whichever method is used to calculate depreciation, the accounting remains the same:
Dr Depreciation expense (SPL) X
Cr Accumulated depreciation (SFP) X
o The depreciation expense account is a SPL account
 is therefore closed off at the year end and
 taken to the statement of profit or loss
 there is no carried forward balance.
o The accumulated depreciation account is a SFP account
 as the name suggests is cumulative, i.e. reflects all depreciation to date.
 For a company, this is usually reflected as a credit directly in the PPE account.
o On the SFP, it is shown as a reduction against the cost of non-current assets:

Cost £X
Accumulated depreciation £ (X)
Carrying amount £ X
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Consistency & subjectivity when accounting for

depreciation
The following are all based on estimates made by the management of a business:
 depreciation method
 residual value
 useful economic life.
Different estimates would result in varying levels of depreciation and so profits  subject
to manipulation of the accounts by management.
IAS 16 PPE requires the following:

 The depreciation method used, residual value and estimated useful life should be
reviewed annually for appropriateness.
o If there are any changes in those items, only current and future periods are
affected by the changes.
Depreciation is often accounted for after the initial trial balance has been extracted. We
need to calculate depreciation for the current period and adjust the initial trial balance to
take account of the depreciation charge to calculate the final trial balance.
103
Subsequent depreciation
Subsequent expenditure is depreciated over the remaining useful life of the
initial asset unless it is stated otherwise.
Once we have changed an estimate:
(Carrying amount @ date estimate changed – RV)

Subsequent depreciation =
Remaining UEL
or if we change to reducing balance:
Depreciation = % × carrying amount at date estimate changed.
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Interactive question 3: Change in depreciation method

Forde plc prepares its financial statements for the 12 month reporting period to 31 December each year. On
1 January 20X0 it bought a machine for £100,000 and depreciated it at 10% per annum on the reducing
balance basis.
On 31 December 20X3, the machine will be included in Forde plc’s financial statements at:
On 1 January 20X4, the company decided to change the basis of depreciation to straight line over a
total life of nine years, ie, five years remaining from 1 January 20X4. There is no residual value.
Requirement
Calculate the revised annual depreciation charge.
105
Interactive question 4: Change in residual value
An asset had a cost of £1,000, an estimated useful life of 10 years and a residual value of £200.
At the start of Year 3, a review shows its remaining useful life was unchanged but the residual
value was reduced to nil.
Requirement
Calculate the depreciation charge for each of Years 1 to 3 on the straight line basis.
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Impairment (IAS 36, Impairment of Assets)

Impairment occurs when the carrying amount of an asset exceeds its recoverable amount.
• Impairment loss = carrying amount - recoverable amount
o The recoverable amount of an asset is the higher of its fair value less costs of disposal
and its value in use. (You will not be expected to calculate value in use in Accounting)
• An impairment loss should be deducted from the carrying amount of the asset and charged
immediately to profit or loss
Indications of impairment:
 External indicators of impairment:
o A fall in the asset's market value.
o A significant change in the technological, market, legal or economic environment.
o The carrying amount of the entity's net assets being more than its market
capitalisation.
 Internal indicators of impairment:
o Evidence of obsolescence or physical damage.
o Adverse changes in the use to which the asset is put.
o Evidence from internal reports that the economic performance of an asset worse than
expected
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Impairment of non-current assets

An impairment means that the recoverable amount of an asset is less than its carrying amount.
o The recoverable amount is determined as follows:
Recoverable amount
Greater of
Fair value less Value in use = the present value of future cash
costs to sell flows expected to be generated by the asset
The difference is charged to the statement of profit or loss

Dr Impairment expense X
Cr Accumulated depreciation X
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Interactive question 5: Impairment

On 1 January 20X1 Tiger buys a non-current asset for £120,000, with an estimated useful life of 20 years
and no residual value. Tiger depreciates its non-current assets on a straight line basis. Its reporting period
is the 12 months ended 31 December.
On 31 December 20X3 the asset has a carrying amount calculated as follows:
Consider each of these alternatives separately.
5.1 On 31 December 20X3 the remaining useful life is revised to 15 years from that date.
Requirement
Calculate the revised annual depreciation charge commencing in 20X4.
5.2 On 31 December 20X3 the remaining useful life is revised to 10 years from that date. An impairment
review has been carried out which shows that the fair value less costs of disposal are £80,000 and the
value in use is £95,000 as at 31 December 20X3.
Requirement
Show how the impairment loss would be recorded in the financial statements for the year ended 31
December 20X3 and calculate the revised annual depreciation charge commencing in 20X4.
109
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Disposal of non-current assets
Profit/Loss on disposal
An accounting profit or loss will arise on the disposal of a non-current asset:
E.g. Say a non-current asset has a carrying amount of £15,000.

o If it is sold for £20,000 then a profit of £5,000 arises.
o If it is sold for £12,000 then a loss of £3,000 arises.
o If it is sold for £15,000 then neither a profit nor a loss arises.
We calculate profit as:

Proceeds X
Less: Carrying amount (X)
–––––
Profit/loss on disposal X/(X)
–––––
111
Accounting for the disposal of non-current assets

Disposal for cash consideration
This is a three step process:
1. Remove the original cost of the non-current asset from the ‘noncurrent asset’
account.
2. Remove accumulated depreciation on the non-current asset from the

‘accumulated depreciation’ account.
3. Record the cash proceeds.
NB: If we are dealing with a company, remember that the tangible non-current assets
are grouped together in the property, plant and equipment account so any disposals
would be removed from here.
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Accounting for the disposal of non-current assets

The balance on the disposals T account is the profit or loss on disposal:
Disposals account [showing a profit on disposal]

Original Cost X Accumulated depreciation X
Profit on disposal ß Proceeds X
––– –––
X X
––– –––
Disposals account [showing a loss on disposal]
Accumulated depreciation X
Original Cost X
Proceeds X
ß
Loss on disposal ß
––– –––
X X
––– –––
The profit or loss can also be calculated as proceeds less carrying amount of asset at disposal.
113
Disposal through a part exchange agreement

A part exchange agreement arises where:
an old asset is provided in part payment for a new one
the balance of the new asset is paid in cash.
The procedure to record the transaction is very similar to the three step process seen for
a cash disposal. There is however a fourth step:
1. Remove the original cost of the non-current asset from the ‘non-current asset’
account.
Dr Disposals original cost
Cr NC Assets original cost
2. Remove accumulated depreciation on the non-current asset from the ‘accumulated
depreciation’ account
Dr Acc'd Dep’n acc'd dep'n
Cr Disposals acc'd dep'n
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4. Disposal of non-current assets

The procedure to record the transaction is very similar to the three step process seen
for a cash disposal. There is however a fourth step:
3. Record the part exchange allowance (PEA) as proceeds and as part of the cost of
the new asset
o Dr NC Assets PEA
o Cr Disposals PEA
4. Record the cash balance paid for the new asset

o Dr NC Assets cash
o Cr Cash cash
5. Balance off the disposals account to find the profit/loss
115
Disposal of non-current assets

Again, the balance on the disposals T account is the profit or loss on disposal:
Disposals account [showing a profit on disposal]
Original Cost X Accumulated depreciation X
Profit on disposal ß Part exchange allowance X
––– –––
X X
––– –––
Disposals account [showing a loss on disposal]
Accumulated depreciation X
Original Cost X
Part exchange allowance X
Loss on disposal ß
––– –––
X X
––– –––
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Non-current asset disposals Write-off NCA cost

Debit Disposal a/c Cost amount
Credit NCA at cost Cost amount
Write-off NCA accumulated depreciation
Debit Acc. Dep a/c Acc Dep amount
Disposal a/c Credit Disposal a/c Acc Dep amount
£ £ Record the sales proceed

Debit Cash a/c/ Other rec Selling amount
NCA Cost Xxx NCA Acc. Depreciation xxx
Credit Disposal a/c Selling amount
Cash at bank Xxx
Record the sales proceed from part-exchange
New NCA Cost Xxx
Debit New NCA a/c Selling amount
(part-exchange)
Credit Disposal a/c Selling amount
P&L a/c Xxx P&L a/c Xxx
(Profit on disposal) (Loss on disposal) Transfer profit on disposal
Debit Disposal a/c Profit on disposal
Credit P&L a/c Profit on disposal
Transfer loss on disposal
Debit P&L a/c Loss on disposal
Credit Disposal a/c Loss on disposal
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Interactive question 6: Non-current asset ledger accounts
A business purchased two machines - machine one and machine two, on 1 January 20X5 at a cost of
£15,000 each. Each had an estimated life of five years and a nil residual value. The straight line method of
depreciation is used.
Owing to an unforeseen slump in market demand for its end product, the business decided to reduce its
output, and switch to making other products instead. On 31 March 20X7, machine one was sold (on
credit) to a buyer for £8,000.
Later in the reporting period, however, it was decided to abandon production altogether, and machine
two was sold on 1 December 20X7 for £2,500 cash.
Requirement
Prepare the machinery account, accumulated depreciation of machinery account and disposal account
for the 12-month reporting period to 31 December 20X7 to determine the profit or loss on disposal of
each machine.
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Machinery a/c
£ £
Acc. Dep of Machinery a/c

£ £
Disposal a/c
£ £
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Adjusting on the Trial Balance

(1) (2) (3) (4) (5) (6) (7)
(Newly bought)
NNN (Disposed)
NCA Cost Xxx Xxx
(Part-exchange) PPP
eee
(Disposed) (Dep. calculated)
NCA Acc. Depreciation Xxx Xxx
ppp DDD
(Disposed)
(Disposed) ppp
Disposal Xxx (Xxx) Xxx
PPP (Part-exchange)
eee
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Non-current asset register
Purpose of a non-current asset register

A non-current asset register is:
o a list of all the non-current assets of the business
o broken down normally by location and asset type
o maintained in order to control non-current assets and keep track of what is owned and
where it is kept.
121
Intangible non-current assets

 Goodwill is created by good relationships between a business and its customers, for example:
o By building up a reputation (word of mouth pe) for high quality products or high standards
of service
o By responding promptly and helpfully to queries and complaints from customers
o Through the personality of the staff, their attitudes to customers and their skills
o Although the value of goodwill to a business might be extremely significant it is not usually
included in the financial statements.
 Goodwill arising on acquisition of a business may appear as an asset in a company’s SFP.
o The purchase consideration paid minus the fair value of the individual assets and liabilities
acquired.
 Development costs that meet specific criteria are capitalised on the statement of financial
position.
o Knowledge of the criteria falls outside the scope of the Accounting syllabus
 Intangible non-current assets should be subject to reviews for impairment of their value.
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Intangible non-current assets

Like tangible non-current assets, intangibles are held on the statement of financial
position at their carrying amount under non-current assets.
Intangibles which have a useful life are amortised over the useful life (amortisation is the
name for depreciation of intangibles) and the amortisation is an expense in the statement
of profit or loss.
Note that internally generated intangibles do not appear on the statement of financial
position as it is generally deemed to be too difficult to estimate their value.
123
Interactive question 7: Goodwill

Toad goes into business with £10,000 capital and agrees to buy Thrush’s shop for £6,500.
Thrush’s recent financial statements show total assets less liabilities of £3,500, which Toad
values at £4,000.
Prepare the statement of financial position of Toad’s business at the following times:
Requirements
7.1 before he purchases Thrush’s business
7.2 after the purchase
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Congrats!
You have finished 10 chaps
It is two-third of the journey
Let prepare for the 2nd Progress Test
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06/29/2022

Chapter 7 Cost of sales and Inventory

Chapter 8 Irrecoverable debts and allowance for receivables

Chapter 9 Accruals and prepayments

Chapter 10 Noncurrent assets and depreciation

Errors and corrections to

Learning topics & Outcome

Upon completion of this chapter, you will be

Reconciling to external documents

PAYABLES RECEIVABLES CASH

SUPPLIER PAYABLES CASH BANK

Trade Receivables and Trade Payables accounts

Trade Receivables and Trade Payables accounts

Trade Receivables and Trade Payables accounts

The double entry for this is:

Dr Trade Payables account

Cr Trade Receivables account

Trade Receivables and Trade Payables accounts

Credit balances on the Trade receivables account

Trade Receivables and Trade Payables accounts

Reconciling to external documents

Supplier statement reconciliations

Supplier statement reconciliations

Supplier statement reconciliation £

Identifying debits and credits

The bank reconciliation

The bank reconciliation

Bank reconciliation £ Notes

Balance before adjustment

Balance after adjustment

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Bank reconciliation £ Notes

Add: Uncleared lodgements

Less: Unpresented cheques

Balance per corrected cash at bank account

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The balance originally shown on the bank statement

PAYABLES RECEIVABLES CASH

SUPPLIER PAYABLES BANK

• Adjustments to payables ledger • Unrecorded differences in cash account

There are ﬁve broad types of error as follows:

Accounting Errors and suspense accounts

A good approach is to consider:

Accounting Errors and suspense accounts

A business received an invoice for £250 from a supplier which it

Repairs worth £150 were incorrectly debited to the non-current

The bookkeeper of a business reduced cash sales by £280

 Could be automated by the accounting system or manually created by bookkeeper.

Accounting Errors and suspense accounts

Dr Statement of financial position account

Dr Statement of profit or loss

Dr Statement of profit or loss

Dr Statement of financial position account

Accounting Errors and suspense accounts

Accounting Errors and suspense accounts

Interactive question 4: Errors

Interactive question 4: Continue

Balance after adjustment

Adjusting the initial trial balance for errors