#3188 - Closing Adjustments

Business Accounts

Closing Adjustments

Trading Account:

Closing stock adjustment

Profit & Loss / Balance Sheet adjustments:

Accrual: expense not yet received by business
Pre-payment: advance payment for next accounting period
Provision for depreciation
Bad debts: debt of customer is written off by business
Provision for bad / doubtful debts: estimate for current debtors (expressed as % of total debtors)
Closing stock (balance sheet only)

ENTER TWICE! BUT:

Bad debt: If already entered into the trial balance, enter ONLY Expense in Profit and Loss Account.

Provision for bad debt: If already entered into trial balance, enter ONLY as Trade debtors in balance sheet.

Trading, Profit and Loss Account AND CLOSING ADJUSTMENTS


Sales (- Returns inwards) LESS cost of sales Opening Stock at (date) Add: purchases (- returns outwards) Less: closing stock Plus: cost of sales Gross Profit (+ discount received) LESS Expenses Rent Repairs Wages Insurance Electricity - Prepayments + Bad Debts written off +Provision for bad debt or Doubtful Debt + Accruals + Depreciation (of x,y,x) + expense + discount given Net Profit

Sales

(- Returns inwards)

LESS cost of sales

Opening Stock at (date)

Add: purchases (- returns outwards)

Less: closing stock

Plus: cost of sales

Gross Profit

(+ discount received)

LESS Expenses

Rent

Repairs

Wages

Insurance

Electricity

- Prepayments

+ Bad Debts written off

+Provision for bad debt or Doubtful Debt

+ Accruals

+ Depreciation (of x,y,x)

+ expense

+ discount given

Net Profit

Balance Sheet AND CLOSING ADJUSTMENTS

	COST	DEPRECIATION	NET BOOK VALUE
Fixed Assets Vehicles Equipment Current Assets (order of liquidity) + Closing Stock Debtors (- bad debts written off) – Provision for bad / doubtful debts + Prepayments Bank Less: Current Liabilities Creditors + Accruals Net Current Assets Less: LT Liabilities Loan Total Net Assets Financed by Capital Add: Net Profit Less Drawings	Original cost	- Depreciation (accumulated)	= Net Book Value

Fixed Assets

Vehicles
Equipment

Current Assets (order of liquidity)

+ Closing Stock
Debtors (- bad debts written off) – Provision for bad / doubtful debts
+ Prepayments
Bank

Less: Current Liabilities

Creditors
+ Accruals

Net Current Assets

Less: LT Liabilities

Loan

Total Net Assets

Financed by

Capital

Add: Net Profit

Less Drawings

Original cost

- Depreciation

(accumulated)

= Net Book Value

Depreciation

Profit and Loss	Add to expense
Balance Sheet	Depreciation is deducted from cost of asset on a cumulative basis, until it is fully depreciated. Cost – depreciation = Net Book Value

Balance Sheet

Depreciation is deducted from cost of asset on a cumulative basis, until it is fully depreciated.

Cost – depreciation = Net Book Value

Straight Line

Expressed as % / fraction of the ORIGINAL COST
Same charge each year!

Reducing Balance Method

Use % given in question
The depreciation charge is calculated on the NET BOOK VALUE (i.e. the cost less depreciation to date)
Calculation results in a higher charge in the earlier years!

Which method to use?

Straight line	Reducing balance
Passage of time Ease of calculation	Repairs / maintenance costs increase during life of asset (depreciation charge will as repair costs

#3188 - Closing Adjustments - Business Accounts

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