Study Unit 10 – Part 1

ADJUSTMENTS AND CORRECTION OF ERRORS

Accounting an Introduction – JE Myburgh – Chapter 6

Paragraphs:

Study: Ignore:

6.1 to 6.8 N/A

Learning outcomes
The end of this study unit you should be able to:
• Discuss the necessity of adjustments in
accordance with IFRS
• Determine the income and expense adjustments
and account for these in the accounting records.
• Identify errors and post the appropriate
correcting journals
Homework

Refer to the work program

Homework questions are uploaded on moodle in the learning materials folder under each study unit.
These questions will be covered during the tutorial class. You can attempt other questions on moodle.
Adjustments

• Transactions not yet in the records at year end, because cash has not
yet flowed.
• Depreciation (PPE)
• Invoices not yet paid (Acrrued income)
• Income not yet received (Accrued expenses)
• Bad debts(credit losses)
• NRV - Inventory
• Inventory on hand (Stock count)
Adjustments
• Refer to:
• Debtors
• Creditors
• PPE
• Inventory
• Remember the write back at the start of the new year
VAT and adjustments

• VAT is levied on the Earliest of invoice or

payment date

• Depreciation no VAT

• Write down to NRV or write of

inventory no VAT
VAT and adjustments year end adjustment Y1

Accrued expenses – Recognize input VAT only when payment

takes place
• Dr Expense 100
Cr Accrued expense 100 Reversal Y2

• Dr Accrued expense 100

Cr Expense 100

• Dr Expense 100
Dr VAT 14
Cr Bank 114
Actual payment Y2
 Year end adjustment
VAT and adjustments Y1

• Accrued income –recognise output VAT when receipt of

money takes place

• Dr Accrued income (SoFP) 100

Cr Income (SoPL) 100 Reversal Y2

• Dr Income (SoPL) 100

Cr Accrued income (SoFP) 100

• Dr Bank (SoFP) 114 Actual receipt Y2

Cr Income (SoPL) 100
Cr Vat output (SOFP) 14
VAT and adjustments
Actual payment
• Prepaid expenses – Recognise input VAT on payment
• Dr Prepaid expense (SoFP) 100
Dr VAT input (SoFP) 14
Cr Bank (SoFP) 114

• Dr Expense 100
Cr Prepaid Expense 100

Year end adjustment

VAT and adjustments
Actual receipt
• Income received in advance– Recognise output VAT on
Receipt of payment
• Dr Bank (SOFP) 114
Cr VAT output (SOFP) 14
Cr Incom rec in adv (SoFP) 100

• Dr Income rec in adv 100

Cr Income 100 Year end adjustment
VAT and adjustments

• Credit losses–recognise input VAT (Irrecoverable)

• Credit losses recovered–recognise output VAT

• Allowance for credit losses – Based on expectations and NO

VAT is recognised
Work sheets

• Six column

No Pre-adjustment trial Adjustments Post-adjustment trial

balance balance
Debit Credit Debit Credit Debit Credit
Errors

• Casting errors posted

• Posted to incorrect account
• Incorrect amount posted
• Incorrect debtors and creditors accounts
• One legged corrections
Errors

• The purchases column was cast and posted with R2 000 too much

Dr ------------------------------------------
Cr Purchases
Errors

• Total rent expense paid is R7 800 and is correct in CPJ. With posting the digits
were interchanged (R8 700)

Dr Rent expense 8 700

Cr Bank 7 800

Dr -----------------------------------------
Cr Rent expense 900
Errors

• Repairs to a vehicle was posted to the vehicles account

Dr Vehicle (SoFP)
Cr Bank (SoFP)

Dr Repairs (SoFP)
Cr Bank (SoFP)

Dr Repairs (P/L)
Cr Vehicles (SoFP)
Errors
• Payment received from Jan Du Preez was posted to the ledger
account of Jan Dippenaar

Dr Bank
Cr Jan Dippenaar

Dr Bank
Cr Jan Du Preez

In the debtors ledger

Dr Jan Dippenaar
Cr Jan Du Preez
Errors
Total rent paid R8 520 was recorded in P/L. At beginning of the 6 th month rent increased
with 15%. Thirteenth payment has already been made. No outstanding amount at
beginning or end of year. 12+1=P/L 5 7+1=8

What is the error?

Dr Rent expense (SoPL) 8 520
Dr VAT input (SoFP) (8520*15%) 1 278
Cr Bank (SoFP) (8520*1.15) 9 798

What is the correct entry?

Prepaid expense? 760

Dr Prepaid expense (SoFP) 760

Cr Rent expense (SoPL) 760

Correct
Errors

Let x be old payment and y new.

5x + 8y =R8 520
y =1.15x
5x + 8(1.15x) =R8 520
14.2x= R8 520
R600 R600x15%=R90

R690 Prepaid
Summary

• Adjustment – corrections at end of the year

• Includes
• Income
• Expenses
• Credit losses
• Depreciation
• Errors