CARIBBEAN MARITIME UNIVERSITY

FACULTY OF SHIPPING & LOGISTICS

Business Accounting 1

Adjustments to Income Statement and Statement of Financial Position (depreciation of non-

current assets, bad debt, allowance for doubtful debt, prepayment, and accrual)

ADJUSTMENTS TO FINAL ACCOUNTS

PREPAYMENT
 These are payments in advance and are treated as a current asset
 Only expenses incurred for a period are charged against the profits made for that period.
 Treatment: The prepayment amount would be subtracted from the expenses in the trial
balance.
a. This would be entered in the statement of income as expense for the period.
b. In the SOFP, the prepaid expense would be entered directly under the debtor in the
current asset section.
SOFP means Statement of Financial Position
ACCRUALS
 Accruals are amounts unaccounted for and still owing at the end of the period
 Add the amount of the accrual to the appropriate expense account and put this figure in
the statement of income.
 Treatment:
a. In the statement of income add the accrued amount to the expense in the trial
balance
b. In the SOFP show the amount of the accrual under the heading current liabilities
section directly under the creditor.
DEPRECIATION
 Reduction in the value of an asset over time
 Straight Line Method - Calculate the percentage given of the cost price.
 Treatment:
a. Charge current period depreciation in the statement of income
b. In the SOFP, add total depreciation i.e from this year and previous year
depreciation and deduct it from the cost price of the asset to get the net book value
of the asset
 Reducing Balance
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 Find the cost price of the asset
Find the total amount of depreciation to date (refer to trial balance)
Find the difference
Using percentage given and calculate the current period depreciation
a. In the statement of income charge the current period depreciation as an expense
b. In the SOFP, deduct total depreciation (this current period plus depreciation
deducted in previous years) from the cost price of the asset to give you the net book
value.
PROVISION FOR DOUBTFUL DEBTS
 Estimated amount of debt that will arise from accounts receivables/debtors for that year.
 Creating a provision:
If a provision is to be created for the first time look in the question for details of the
amount to be set aside.
a. The provision for doubtful debt would have been charged to the statement of
income as an expense.
b. In the SOFP, the provision for doubtful debts would have been deducted from the
debtors.
 Treatment:
 Increase the Provision:
Refer to your question and ascertain the new provision for this year. Find last year’s
provision from the trial balance
a. In the statement of income charge the difference between new and old provision
b. In the SOFP, deduct the new provision from the debtors
 Reducing the Provision
Refer to your question and ascertain the new provision.
Take the difference between the old and the new provision
a. Add the difference as revenue in the statement of income
b. In the SOFP deduct the new provision for doubtful deb from debtors
BAD DEBT
 A debt that cannot be recovered
a. Simply write off as an expense in the statement of income.
b. Bad debt written off is shown as an expense in the statement of income

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Questions

1. The following list of balances as at 31 December 2013 has been extracted from the
books of Angela Anderson.
$ $
Sales 216 800 Provision for bad debts 1610
Purchases 121 600 Inventory Jan 1, 2013 63260
Returns outwards 2 700 Accounts Receivables 44920
Returns inwards 2 400 Accounts payable 24340
Carriage inwards 2 900 Drawings 14310
Advertising expenses 4 348 Cash at Bank 12000
Wages and salaries 10 620 Fixtures at cost 22000
Discount allowed 2 618 Motor van 48800
Telephone expenses 1 620 Provision for Depreciation:
Insurance 5 000 Fixtures 8800
Bad debts 3 032 Motor van 4720
Capital 100458

The following information is available as at December 31, 2013:

Closing inventory $73 060
Insurance prepaid $1 000
Wages owing $2 500
Provision for bad debts to be increased to $1 760
Depreciate fixtures at the rate of 20% reducing balance and motor van at 10% of original
cost.

REQUIRED
Prepare the Income Statement for Angela Anderson for the year ended 31 December 2013 and a
statement of financial position as at that date.

2. The following list of balances is from the ledger of Mrs. Graver a sole proprietor as at
April 30, 2018.

Purchases $61,420
Sales $127,245
Stock May 1, 2017 $7,940
Capital May 1, 2017 $25,200
Bank overdraft $2,490
Cash $140
Discount Allowed $2,480
Interest Received $62
Returns inwards $3,486
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Returns outwards $1,356
Carriage outwards $3,210
Rent and insurance $8,870
Provision for doubtful debts $630
Fixtures and fittings $1,900
Van $5,600
Debtors $12,418
Creditors $11,400
Drawings $21,400
Wages and salaries $39,200
General office expenses $319

Additional Notes:
a. Stock April 30, 2018 $6,805.
b. Wages and salaries accrued at April 30, 2018, $3,500; Office expenses owing $16.
c. Rent prepaid April 30, 2018 $600.
d. Increase the provision for doubtful debts by $110.
e. Provide for depreciation as follows: Fixtures and fittings $190; Van $1,400.

You are required to prepare an Income Statement for Mrs. Graver for the year ended April 30,
2018 and the statement of financial position as at April 30, 2018.

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