ACCA F3 (INT) Financial Accounting - 2010 - Study text - Emile Woolf Publishing
Подождите немного. Документ загружается.
Chapter 6: Non-current assets
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 175
C $60,000
D $92,000
(2 marks)
5 A company purchased a building two years ago for $4 million. The building has an
expected life of 50 years and straight line depreciation is used. After two years the
building was re-valued to $4.8 million.
What should be the accounting entries for depreciation and excess depreciation in the
following year?
Dr Cr
$ $
A
Depreciationexpense 80,000
Accumulateddepreciation 80,000
Revaluationreserve 20,000
Retainedprofits 20,000
B
Depreciationexpense 100,000
Accumulateddepreciation 100,000
Revaluationreserve 20,000
Retainedprofits 20,000
C
Accumulateddepreciation 100,000
Revaluationreserve 20,000
Depreciationexpense 120,000
D
Accumulateddepreciation 80,000
Retainedprofits 40,000
Depreciationexpense 100,000
Revaluationreserve 20,000
(2 marks)
Paper F3: Financial accounting (International)
176 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 177
Paper F3 (INT)
Financial Accounting
CHAPTER
7
Accruals and prepayments.
Receivables and payables
Contents
1 Accrualsandprepayments
2 Receivables:baddebts(irrecoverabledebts)
3 Receivablesledgercontrolaccount
4 Payablesledgercontrolaccount
Paper F3: Financial accounting (International)
178 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Accruals and prepayments
The matching concept (accruals concept)
Accrued expenses (accruals)
Accrued expenses: calculating the expense for the income statement
Prepaid expenses (prepayments)
Prepaid expenses: calculating the expense for the income statement
Accrued expenses and prepayments: the rules summarised
Accrued income and prepaid income
1 Accruals and prepayments
The previous chapters have explained that at the end of a financial year,
adjustments are made in the accounts to record depreciation (and amortisation) on
non-current assets and to deal with opening and closing inventory.
End-of year adjustments are also required for accruals and prepayments, and for
irrecoverable debts. These are explained in this chapter.
1.1 The matching concept (accruals concept)
Financial statements are prepared using the accruals basis of accounting. This
means that:
Sales should be matched with the cost of making those sales, to establish the
gross profit for the accounting period. The adjustments for opening and closing
inventory achieve this purpose.
Time-related expenses should be charged against profit for the period to which
the expenses relate. The actual payment in cash for these expenses, and when
these payments occur, is irrelevant. Examples of time-related expenses are rental
costs and insurance costs.
For example, the cost of rental charges on office accommodation should be spread
over the period of time to which the rental payments relate, regardless of when the
actual payment of rent occurs. If annual rental is paid in advance on 1 June each
year, and the financial year ends on 30 September, the rental charge in the income
statement for the year to 30 September 2010 would be:
8/12 of the annual rental paid on 1 June 2009 for the period 1 October 2009 – 31
May 2010, plus
4/14 of the annual rental paid on 1 June 2010 for the period 1 June – 30
September 2010.
At 30 September 2010, the company has already paid rent in advance for the 8
months 1 October 2010 to 31 May 2011.
Chapter 7: Accruals and prepayments. Receivables and payables
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 179
1.2 Accrued expenses (accruals)
Accrued expenses are expenses incurred in an accounting period that have not yet
been paid and for which no invoice has been received. Accrued expenses occur
when expenses are paid in arrears.
Since there has been no payment and no invoice, a financial transaction has not yet
occurred and there is not yet anything to record as a book-keeping entry in the
ledgers. However, to apply the accruals basis of accounting, the expense must be
charged in the income statement for the accounting period to which the expense
relates.
This is done by creating an accrued expense at the end of the accounting period. An
accrued expense (accrual) is an estimate of the cost that has been incurred in the
financial period, and it is included in expenses in the income statement for the
period.
There are two ways of accounting for accruals at the end of an accounting period.
Method 1: the ‘two account’ approach for accrued expenses
The accrued expense is recorded in an accrued expenses account. The double
entry for this adjustment is:
− Debit the expense account with the accrued expense at the end of the period.
− Credit the accruals account.
The accrued expense is therefore added to the expense in the current accounting
period. The credit balance on the accruals account is a liability, and should be
included in the statement of financial position as a current liability (or ‘sundry
payable’).
At the beginning of the next accounting period, the balance in the accruals
account is taken back to the expense account by means of the following double
entry:
− Debit the accruals account with the accrued expense for the previous period.
− Credit the expense account.
Method 1 is used in computerised accounting systems.
Method 2: the ‘one account’ approach for accrued expenses
With the one account approach, we do not use an accruals account.
An accrued expense at the end of an accounting period is recorded in the
expense account as a closing balance at the end of one period and an opening
balance at the beginning of the next period.
− Debit the expense account ‘above the line’ (for the current accounting period)
with the accrued expense at the end of the period.
− Credit the expense account ‘below the line’ as an opening credit balance at
the beginning of the next period.
Paper F3: Financial accounting (International)
180 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
The accrued expense at the end of the period is included in the statement of
financial position as a current liability (accruals).
Example
Yuri sets up in business on 1 January Year 1. He acquires a telephone system on 1
February, and pays telephone charges every three months in arrears. The telephone
invoices for Year 1 are as follows:
$
30 April 5,000
31 July 7,500
31 October 8,500
It is expected that the next invoice, at the end of January Year 2, will be for $9,000.
Yuri prepares his annual accounts to 31 December each year.
To calculate the telephone expenses for Year 1, it is often necessary to estimate the
expense for November and December, and to make an accrual. If the estimated
invoice at the end of January Year 2 is $9,000, the accrual for November and
December Year 1 should be $6,000 ($9,000 × 2/3).
Method 1: two account approach
Telephoneexpensesaccount
Year1
$ $
Bank 5,000 Incomestatement 27,000
Bank 7,500
Bank 8,500
Accruedexpense(accrualsaccount) 6,000
27,000 27,000
Year2
Accrualsaccount 6,000
Accrualsaccount
Year1
$ $
Closingbalancec/f 6,000 Telephoneexpensesaccount 6,000
6,000 6,000
Year2
Telephoneexpensesaccount 6,000 Openingbalanceb/f 6,000
The accruals account balance is reduced to 0 at the beginning of Year 2 by
transferring the balance to the telephone expenses account.
Chapter 7: Accruals and prepayments. Receivables and payables
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 181
Method 2: one account approach
Telephoneexpensesaccount
Year1
$ $
Bank 5,000 Incomestatement 27,000
Bank 7,500
Bank 8,500
Closingbalancec/f 6,000
(accruedexpense)
27,000 27,000
Openingbalanceb/f 6,000
The expense in the income statement for Year 1 is $27,000 and the accrued expense
of $6,000 is included in the statement of financial position as a current liability at the
end of Year 1.
Example (continued)
In Year 2, the telephone invoices are as follows:
$
31 January 9,500
30 April 9,500
31 July 10,000
31 October 10,000
It is expected that the next invoice will be for $10,500.
If the estimated invoice on 1 February Year 3 is $10,500, the accrual for Year 1
should be $7,000 ($10,500 × 2/3).
Method 1: two account approach
Telephoneexpensesaccount
Year2
$ $
Bank 9,500 Accrualsaccount 6,000
Bank 9,500 Incomestatement 40,000
Bank 10,000 (balancingfigure)
Bank 10,000
Accruedexpense(accrualsaccount) 7,000
46,000 46,000
Year3
Accrualsaccount 7,000
Paper F3: Financial accounting (International)
182 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Accrualsaccount
Year2
$ $
TelephoneexpenseaccountClosing
balancec/f
6,000
7,000
Openingbalanceb/f
Telephoneexpensesaccount
6,000
7,000
13,000 13,000
Openingbalanceb/f 7,000
Method 2: one account approach
Telephoneexpensesaccount
Year2
$ $
Bank 9,500 Openingbalanceb/f 6,000
Bank 9,500
Incomestatement 40,000
Bank 10,000 (balancingfigure)
Bank 10,000
Closingbalancec/f 7,000
(accruedexpense)
46,000 46,000
Openingbalanceb/f 7,000
The expense in the income statement for Year 2 is $40,000 and the accrued expense
of $7,000 is included in the balance sheet as a current liability at the end of Year 2.
1.3 Accrued expenses: calculating the expense for the income statement
When there are accrued expenses for an item of expenditure, the total amount to be
charged to the income statement for the period is:
$
Invoices/payments for the year A
+ Closing accrued expense B
A + B
– Opening accrued expense C
= Expense for the year A + B - C
Alternatively, the annual charge can be calculated applying the accruals concept
and working out the cost on a time basis.
Example
A company rents a machine and pays rental charges quarterly in arrears on 28
February, 31 May, 31 August and 30 November each year. The annual rental was
$12,000 until 1 September 2010, when it was increased to $18,000.
The company’s financial year ends on 31 December.
Chapter 7: Accruals and prepayments. Receivables and payables
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 183
Method 1
For the year to 31 December 2010, the annual machine rental cost, for inclusion in the
income statement for the year, can be calculated as follows.
$
For the 8 months 1 January – 31 August 2010: 8/12 × $12,000
8,000
For the 4 months 1 September – 31 December 2010: 4/12 × $18,000
6,000
Total rental charge for the year 14,000
At 31 December 2010, there is an accrued expense for the rental cost in December
2010. This will not be paid until 28 February 2011. Accrued rent of $1,500
($18,000/12 months) for one month will therefore be included in accruals (a
liability) in the statement of financial position at 31 December 2010.
In the same way at 31 December 2009, the previous year, there was accrued rental
costs of $1,000 (= $12,000/12 months) for rent in December 2009.
Method 2
The total amount to be charged to the income statement for the year to 31 December
2010 could also be calculated as follows:
$
28 Feb, 31 May, 31 August 2010 (3/4 × $12,000)
9,000
30 November 2010 (1/4 × $18,000)
4,500
+ Closing accrued expense at 31 December 2010 1,500
15,000
– Opening accrued expense at 1 January 2010 (1,000)
= Expense for the year 14,000
Both methods produce the same answer. You might find Method 1 easier to
remember and apply.
Exercise 1
A business has an accrued expense for factory rental on 1 January Year 3 of $28,000.
Payments of factory rental were $42,000 on 28 February, $42,000 on 31 May, $42,000
on 31 August and $48,000 on 30 November. The next rental payment on 28 February
Year 4 will be $48,000.
Required
Calculate the expense for factory rental for the year to 31 December Year 3 and the
accrued expense in the statement of financial position as at that date.
Paper F3: Financial accounting (International)
184 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
1.4 Prepaid expenses (prepayments)
Prepaid expenses are expenses that are recorded in the accounts in the current
period, because a purchase invoice has been received or a payment has been made,
but all or part of the expense relates to a future accounting period.
Prepaid expenses occur whenever payments are made in advance for an expense
item.
To apply the accruals basis of accounting, the expenses that have been recorded in
the accounts but that relate to a future accounting period should be:
excluded from the expenses in the income statement for the current year and
included in the expenses for the next financial period, which is the period to
which they relate.
Accounting for prepayments at the end of an accounting period is similar to
accounting for accrued expenses. There is a ‘two account’ and a ‘one account’
method.
Method 1: the ‘two account’ approach for prepayments
The prepayment is recorded in a prepayments account. The double entry for this
adjustment is:
− Debit the prepayments account with the amount of the prepayment at the
end of the period.
− Credit the expense account.
The prepayment therefore reduces the expense in the current accounting period,
because it is a credit entry in the expense account. The debit balance on the
prepayments account is an asset, and should be included in the statement of
financial position as a current asset.
At the beginning of the next accounting period, the balance in the prepayments
account is taken back to the expense account by means of the following double
entry:
− Debit the expense account with the prepayment for the previous period.
− Credit the prepayments account.
Method 1 is used in computerised accounting systems.
Method 2: the ‘one account’ approach for prepayments
With the one account approach, we do not use a prepayments account.
A prepayment at the end of an accounting period is recorded in the expense
account as a closing balance at the end of the current accounting period and an
opening balance at the start of the next period.
− Credit the expense account ‘above the line’ (for the current accounting
period) with the prepayment at the end of the period.