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 Structure of some special accounts

01. Depreciation of fix 02. Advance payment by 03. Advanced payment to

asset/Accumulated depreciation customers suppliers

04. Deferred revenue 05. Prepaid expense 06. Provision for

payable expenses
Accumulated depreciation
What is accumulated depreciation?

● Depreciation is recorded to tie the cost of using a long-term

capital asset with the benefit gained from its use over time.

● Accumulated depreciation is the sum of all recorded

depreciation on an asset to a specific date.
 Structure of Accumulated depreciation

Opposite with asset account

Debit Accumulated depreciation Credit

S
T
Beginning balance: Accumulated
R
U
depreciation at beginning of
C accounting period
T Debiting: Decreased Crediting: Increased
U depreciation value of fixed depreciation value of fixed
R asset in accounting period asset in accounting period
E
Ending balance: Accumulated
depreciation at end of accounting period
 Example
debit credit
ABC Company purchased equipment on January 1,
2015 for $100.000. They calculated that it should - Beginning balance

have $10.000 of depreciation expense per year. On

December 31, 2017, the balance of the $10.000 Dec 31, 2015
accumulated depreciation account is:

$10.000 Dec 31, 2016

$10.000 Dec 31, 2017

$30.000 Ending balance:

Advanced payment by
customers
*Definition:

Advanced payment by customers is A customer may pay

in advance for goods being delivered or services being
provided.
 Structure:as equity account structure

Advanced payment by customers

S
T
Beginning balance: Advanced
R
U payment remained at beginning of
Debiting: Advanced payment accounting period
C decreased in accounting period
T
U Crediting: Advanced payment
R increased in accounting period
E
Ending balance: Advanced payment
remained at end of accounting period
* Possible reasons for a customer advance * Examples of advance payments
Paying for subscription services, such as a streaming
network or club membership, for a whole year instead of
a) Customer Advance Due to Bad Credit monthly.

Paying monthly premiums to your insurance company in

b) Customer Advance Due to Custom Product advance of needing their protection.

c) Customer Advance Due to Cash Basis Accounting

d) Customer Advance Due to Reserved Capacity

Advanced payment to
suppliers
* Definition

Advance to suppliers basically refers to the amount paid to

suppliers in advance for goods and services to be purchased at a
later date.
 Classification of Advance to Suppliers

Advance to Suppliers is a payment that is For long-term orders, Advance to Suppliers

made in advance for a service (or good)
that is to be utilized at a later date.
Therefore, it is classified as a Current
Asset
is supposed to be treated as a Non-Current
Asset, because the utility derived behind
the particular payment is supposed to
generate benefits for a period longer than
12 months.
 Journal Entries for Advance to Suppliers

Particular Debit Credit Particular Debit Credit Particular Debit Credit

Advance xxx Current Asset xxx Bank xxx
to - (Inventory)
Supplies
Bank xxx Advance to xxx Advance to xxx
the suppliers Suppliers
 Example of Advance to Suppliers
Henry Co. is a trading concern that purchases goods and sells them at its retail outlet. For furniture-related
items, they purchase goods from Brighto Inc. and display them in the showroom. For the year ended, 31st
December 2019, they paid their furniture supplier $25,000 for the items to be delivered in July 2020.

Particular Debit Credit Particular Debit Credit

Advance to Brighto $25,000 Furniture Inventory $25,000
Inc.
(Supplier
prepayments) Advance to Brighto $25,000
Inc.
Bank $25,000 (Supplier
prepayments)
Deferred revenue
What Is Deferred Revenue?

• Deferred revenue, also known as unearned revenue, refers to advance

payments a company receives for products or services that are to be
delivered or performed in the future.
• Another term for deferred revenue is uneared revenue
 Structure:as equity account structure

Deferred revenue
S
T
Beginning balance: Unallocated
R
U deferred revenue at beginning of
Debiting: Deferred revenue accounting period
C allocated into income in
T
accounting period Crediting: Deferred revenue
U
R increased in accounting period
E
Ending balance: Unallocated deferred
revenue at end of accounting period
 Example
Consider a media company that receives $1,200 in
advance payment at the beginning of its from a
customer for an annual newspaper subscription at the
rate of $100 per month. The balance is now $0 in the
deferred revenue account until next year's prepayment
is made.
Deferred revenue
Dr Cr

$1.200
$100

0
Prepaid expense

* Definiton

A prepaid expense is a type of asset on the balance sheet that results

from a business making advanced payments for goods or services to
be received in the future.
 Example
Company A signs a one-year lease on a At the end of one month, Company A would’ve
warehouse for $10,000 a month. The landlord used up one month of its lease agreement.
requires that Company A pays the annual Therefore, prepaid rent must be adjusted:
amount ($120,000) upfront at the beginning of
the year.

The initial journal entry for Company A would

be as follows:

Note: One month corresponds to $10,000 ($120,000 x

1/12) in rent.
The adjusting journal entry is done each month, and at
the end of the year, when the lease agreement has no
future economic benefits, the prepaid rent balance
would be 0.
Provision for payable
expenses
Definition:
• A provision refers to the amount that is typically set aside from
profits in order to cover probable future expenses or an asset
reduction, although it is uncertain exactly how much is set aside.
From the definition of the provisions, we can establish that a provision:
• Only arises in anticipation of expected obligation arising from an
entity’s action
• Is a contingent liability
• It might vary in amount and time of payment
*When to recognize an expense provision? * Some most common examples of provision

• A present expense payable arose as a result of any We often come across during the preparation of
legal or constructive obligation financial statements are: Warranties, Bad debts,
• A probable expense Any penalty for an ongoing lawsuit, Customer
• The amount can be estimated reliably Refunds, Tax Obligation
 Structure:as equity account structure

Provision for payable expenses

S
T
Beginning balance: Provision for payable
R
U expenses accumulated at beginning of accounting
Debiting: Actual payable period
C expenses arising in accounting
T
period Crediting: Deduction of provision for payable
U
R
expenses accounted into expense in accounting
E period

Ending balance: Accumulated provision for

payable expenses at end of accounting period
 Example
The car manufacturer creates a provision for payable
expenses of $20,000. Their warranty policy is the car’s first
three years or 36,00 miles,and there’s a product malfunction
at 22,500 miles in year two.so the company uses a
provision for payable expenses of $10,000.

Deferred revenue
Dr Cr
$20.000

$10.000

$10.000
 T

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