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LPC - BLP MODULE - SOLICITORS ACCOUNTS (DISTINCTION)
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Solicitors accounts notes
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BLP - Accounts for SolicitorsIf electricity bill has been received not NOT yet paid – no entries in the accounts. This can mean that
this would be recorded in the accounting period when they get paid rather than the accounting
period to which they relate.
Accruals
The accruals basis requires that income and expenditure are recorded in the period to which they
relate rather than that in which payment or receipt occurs.
Final Accounts must include all expenses which relate to the accounting period, irrespective of
whether the expense has been paid or whether bills have been received.
Accruals basis requires the Final Accounts to include all income ‘earned’ during the period,
regardless of whether cash has been received or bills delivered.
If an expense has been paid in the current accounting period which actually relates to an earlier or
later period, it will NOT be included in the current Final Accounts.
Income that has been received in the current accounting period which relates to an earlier or later
period will NOT be included in the current Final Accounts.
This is called ‘matching’. Match the expense to the period in which the benefit of the expense was
obtained, and to match the income to the period in which the work producing the income was done.
Final Accounts are prepared using figures from the Trial Balance.
Different types of adjustments…
1. Outstanding expenses
If a Trial Balance for a business includes a balance on the electricity account of 1000 – this figure
reflects those electricity bills PAID during the accounting period.
A business receives a further bill for 200 for electricity used during the current year but the bill
has not been paid by the time the Trial Balance is prepared at the end of the Accounting period.
As it hasn’t been paid, it is NOT included in the Trial Balance figure. However, the electricity has
been used this year and therefore, relates to this year. The Trial Balance figure is therefore too
low.
Adjustment is made by increasing the Trial Balance figure of 1,000 by 200. 1,200 is then shown
on the Profit and Loss as the true expense for the current accounting period.
Adjustment will also be shown on the Balance Sheet. Amount of the unpaid bill is on shown on
the Balance Sheet as a current liability. The business will start the next accounting year with the
bill still owing.
2. Payments in advance
These are the opposite of outstanding expenses. It may be that the business pays an
expense this year but will not get the benefit until next year e.g rent paid in advance.
, Payment made and recorded in the current accounting year but the expense really relates to
the following year.
If a Trial Balance for a business includes a balance on the stationery account of 600, which
includes 50 for stationery bought this year but which the business will use NEXT year, the
Trial Balance figure for the expense of stationery is too HIGH.
Need to adjust the Trial Balance figure of 600 by reducing it by the amount of the payment
in advance, 50. The reduced expense of 550 is then shown on Profit and Loss as the true
amount for the current accounting period.
Amount of payment in advance is shown on the Balance Sheet as a CURRENT ASSET. It
shows that the business will begin the next accounting year being able to use something in
the future without any further payments.
3. Work in Progress
Firm of solicitors earns income by sending a bill to a client for the work done. This is
recorded when the bill is delivered to the client and the relevant entries are then made in
the client’s account and the profit costs account.
Often be the case that solicitor will reach the end of the accounting period without billing a
client. As a bill hasn’t been delivered, no entries will have been made on the profit costs
account but the work has been done in the current year and it properly relates to the
current year.
Estimated value of work done but not yet billed increases the profit costs attributable to the
current period and MUST be added to the balance on the profit costs account appearing on
the Trial Balance. The increased figure for profit costs must be shown in the INCOME section
of the Profit and Loss account.
Estimated figure for work in progress at the end of the year is also shown on the Balance
Sheet. Figure will appear as an additional item in the current assets section.
4. Closing Stock
Necessary for a trading business to make an adjustment for the value of any stock purchased
during the year and left unsold at the end of the year. Adjustment is made by showing the
value of closing stock appearing in the Trading Account as a deduction from purchases in
order to calculate the cost of goods sold.
Figure for closing stock will also appear as an additional item in the current assets section of
Balance Sheet – shows that business will be starting next accounting year with benefit of the
stock that has already been purchased.
Business will have started the year with some stock in the warehouse left over from previous
year. Value of this opening stock MUST be taken into account when calculating the cost of
goods sold.
Costs of goods sold = purchases + opening stock – closing stock.
Value given for closing stock is an estimate as there is no guarantee that the goods left can
be sold.
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