Adjustments

1. Prepayments and accruals –

a. Prepayments are expenses or revenues that have been paid with
extras for the future. A prepaid expense is an asset. A prepaid
revenue or income is a liability. Why? (Prepayments are subtracted)
b. Accruals are unpaid amounts for use of services during a time. An
accrued expense is a liability. An accrued income is an asset. Why?
(Add accruals)
2. Depreciation this refers to the loss in value of fixed assets that occurs as time
passes. There are two methods used to systematically calculate
depreciation:
a. Straight line method – the depreciation rate × at Cost value of the fixed
asset. Some questions may ask for you to calculate the straight-line
depreciation using the cost, scrap value and number of years of useful
𝐶𝑜𝑠𝑡−𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
life of the asset. This formula is = Annual
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
depreciation. The residual value may also be called the scrap value.
b. Reducing balance method – the depreciation rate × the book value of
an asset. The book value is calculated as the cost  provision for
depreciation. Note these methods all give us the depreciation of the
asset for one year. The accumulated depreciation must be shown for
all years together in the balance sheet.
3. Provision for doubtful debts this is a figure that reduces the accounts
receivable asset in the balance sheet. It is necessary because smart
businesses know that some receivables may never be repaid. The additional
information will give instructions about what change must take place in the
financial statements. The income statement will only show the change in
provision for doubtful debts. This is calculated as new minus old. If the result
is positive it is listed as an “expense”, if it is negative it is listed as an “other
revenue”.

©Billy Sieunarinesingh