Consolidation notes on BLP business accounts covering:
- ALCIE and the trial balance
- Key end of year adjustments (how to calculate, their effect on the P&L account, their effect on the BS)
- Key transactions and their effects on the P&L account, BS
- Partnerships
- Terminology (diffe...
Business Accounts
Dual-entry bookkeeping = every transaction a business undertakes will be recorded in two places its books = debit entry and credit entry.
This means that DR = CR so the trial balance balances.
ALCIE and the Trial Balance
Each entry must be classified as either an Asset /Liability / Capital / Income / Expenses
Assets Liabilities Capital Income Expenses
= something the Co owns = something the Co owes = injections from = from regular sources
Fixed assets (ST)/ Non-current assets (held > 1 year) Current liabilities (to be paid < 1 year) Sales, investments (i.e., dividends from Lighting, heating, insurance, salaries,
investments) stationery, printing, telephone, postage,
sales commission, general expenses, bad
Building, equipment, land, motor vehicles, Bank overdraft, trade creditors (ST)/ payables (Co) debts, rent, motor vehicle running expenses,
trademark, long-term investments travel/ entertainment expenses, loan
interest, bank charges, rates, sundry
expenses, legal fees, accountancy fees.
!/!: year-end adjustment in respect of their
depreciation.
Current assets Non-current liabilities (to be paid > 1 year)
Cash, stock (ST)/ inventory (Co), debtors (ST)/ Term loan
receivables (Co), cash, petty cash, cash at bank, short
term investments.
Key end of year adjustments
Certain entries on the Trial Balance may need to be adjusted to ensure that the figures on the final financial statements relate to the relevant AP and that we anticipate certain obligations as liabilities.
Financial statements include a:
Profit & Loss Account: summarises the financial health of a business over time, and
Balance Sheet: snapshot of financial health ‘as at’ a given date
Adjustment Calculation Effect on P&L Account Effect on the Balance Sheet
Depreciation 1. Calculate the depreciation charge for the asset for the year and Depreciation Charge will be shown in a ‘Provision for
add it to the ‘Provision for Depreciation’ Expense Account Depreciation’ account
= deals with decline in value of
an asset as it spreads the cost Straight line method = original cost x %[] depreciation rate
of an asset over its useful life
Reducing balance = (original cost – provision for depreciation) x %[]
2. Add the Depreciation Charge to the Provision for Depreciation at
the start of the year in the liability account to get your
accumulated depreciation at end of year
3. Calculate the NBV of the asset at the date of the BS = original cost
Accumulated Depreciation at end of year will be shown
in the accumulated depreciation account
Net value of the asset
Accruals Expense in the P&L Account = expense in trial balance + Current liability in the BS = amount of accrual
amount of accrual
= benefit of X received in AP 1 !/! state it is a current liability
but not paid for until AP 2
Prepayments Expense in the P&L Account = expense in trial balance – Current asset in the BS = amount of the prepayment
amount of prepayment
= business paid for X in AP 1 !/! state it is a current asset
but will only receive the
benefit in AP 2
Debts Calculate bad debts and doubtful debts together.
Bad debts = never repaid 1. Find the provision for doubtful debts at the start of the year – in Expense in the P&L account ‘bad and doubtful debts’ Receivables (Co) / Debtors (ST) asset account is reduced
the Trial Balance by the amount of the bad debt
2. Find the provision for doubtful debts at the end of year: !/!: if the bad debt has already been written off, then
the receivables amount will already reflect the bad debt
and won’t need to be reduced. If the bad debt has not
General = % of receivables been written off yet, the receivables amount needs to
be reduced to reflect this.
Specific = £[] will not be paid.
Remember, if there are bad debts not yet written off, subtract these
from receivables.
!/!: If you have specific provision and a general provision:
Take away the specific provision from the Adjusted
Doubtful debts = maybe Receivables Expense in the P&L account ‘bad and doubtful debts’ Provision for doubtful debts treated as a liability on the
repaid BS matched to the receivables asset account
Take the outcome figure x % of general
Add back the specific provision
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