The document discusses five key adjustments that are made to the financial statements of a sole trader:
1) Closing stock is physically verified and valued at the end of the accounting period.
2) A provision for doubtful debts is made to account for debts that may not be collected.
3) Accrued expenses are recognized before being paid to match expenses with the period they occurred in.
4) Prepaid expenses are initially recorded as assets and expensed over time as the benefit is received.
5) A provision for depreciation is made to allocate the cost of assets over their useful lives.
The document discusses five key adjustments that are made to the financial statements of a sole trader:
1) Closing stock is physically verified and valued at the end of the accounting period.
2) A provision for doubtful debts is made to account for debts that may not be collected.
3) Accrued expenses are recognized before being paid to match expenses with the period they occurred in.
4) Prepaid expenses are initially recorded as assets and expensed over time as the benefit is received.
5) A provision for depreciation is made to allocate the cost of assets over their useful lives.
Copyright:
Attribution Non-Commercial (BY-NC)
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Download as DOC, PDF, TXT or read online from Scribd
The document discusses five key adjustments that are made to the financial statements of a sole trader:
1) Closing stock is physically verified and valued at the end of the accounting period.
2) A provision for doubtful debts is made to account for debts that may not be collected.
3) Accrued expenses are recognized before being paid to match expenses with the period they occurred in.
4) Prepaid expenses are initially recorded as assets and expensed over time as the benefit is received.
5) A provision for depreciation is made to allocate the cost of assets over their useful lives.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online from Scribd
The financial statements of a sole trader with adjustments
Adjustments to the financial statements (1) Closing stock
The value of closing stock is not available ready hand in the books of accounts. It is specifically ascertained at the end of the accounting period by physical verification of stock and its valuation at cost or net realizable value whichever is lower. J/E : Closing Stock Account Trading Account (Being recording the closing stock) Dr xxxxx Cr xxxxx
(2) Provision for doubtful debts
The allowance for doubtful accounts is a balance sheet account that reduces the reported amount of debtors/accounts receivable. Providing an allowance for doubtful accounts presents a more realistic picture of how much of the debtors/accounts receivable will be turning to cash. After all, a company selling products (or services) on credit to thousands of customers will likely have a few customers who will not be able to pay the full amount they owe to the company. If the business is uncertainty about the collectibles of debts a provision can be mad e against those debts. J/E : Doubtful debts account Provision for doubtful debts account (Being recording doubtful debts) Dr xxxxx Cr xxxxx
(3) Accrued Expenses
An accounting expense recognized in the books before it is paid for. It is a liability, and is usually current. These expenses are typically periodic and documented on a company's balance sheet due to the high probability that they will be paid in near future. Ex: The financial period ends on 31.12.2009.The telephone bill of Rs.1,000 for the month of December was paid on 10.01.2010.This Rs.1,000 has to be recorded as an accrued expense for the 2009 period though it was paid in 2010.( Refer accrual concept) J/E: . Expenses account Accrued . Exp. exp payable account (Being recording of the telephone expenses payable for) Dr xxxxx Cr xxxxx
The financial statements of a sole trader with adjustments
(4) Prepaid Expenses
A type of asset that arises on a balance sheet as a result of business making payments in advance. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is received onto the income statement, because unlike conventional expenses, the business will receive something of value in the near future. J/E: Pre paid expenses account ..expense account (Being adjustment of pre paid expenses) Dr xxxxx Cr xxxxx
(5)Provision for depreciation
Depreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years. In common speech, depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors. Deprecation percentage is decided based on the useful life of the asset. Methods of depreciation 1. Straight-Line Method: Straight-line depreciation is the simplest and most-often-used technique Annual depreciation = original cost* annual depreciation % 2. Declining-Balance Method Annual deprecation = (original cost accumulated depreciation)* annual deprecation % J/E : depreciation Provision for depreciation (Being make provision for deprecation) Dr xxxxx Cr xxxxx