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Summary FAC1502 - UNIT6 Financial Accounting Adjustments
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FAC1502 - UNIT6: Financial Accounting AdjustmentsAdjustments
Entries made to correct balances before preparing final accounts. You should be
able to do year-end adjustments to balances in the books of an entity.
Short-term adjustments
The profit or loss account, statement of profit or loss and other comprehensive
income is prepared for a specific financial period. It must encompass all income
and expenses for that period, regardless of payment or receipt status.
Prepaid expenses Short-term adjustments
Expenses paid in the current period but related to future periods. An adjustment is
consequently necessary
1) Prepaid expenses January 2, 20.1, Xa-Xa Dealers paid annual insurance
premium of R2,400.Financial year concluded on February 28, 20.1. Up to that
date, the actual insurance expense was R400, calculated as R200 per month
for January and February (R2,400/12 months). Therefore, R2,000 was
prepaid
The debit balance in the expense account for insurance has to be reduced by R2
000. To reduce an expense account, a credit entry has to be made.to Write off the
2000
1.1 ) Prepaid expenses close off the ACC for the 400. That is the insurance
account and profit or loss account
Closing of insurance account to profit or loss account.
1. 2) Prepaid expenses Now Post to the general ledger to make these
adjustments
Insurance account: debit side bank entry is the with the full amount of expense
R2400. Credit same account with Prepaid expenses R2000 and Profit or loss
account R400. this closes off the account and next, the adjustments are made
1. 3) Prepaid expenses, Now the adjustments. the two thousand is moved from
the insurance account to the Prepaid expenses account.
, So, the amount was a credit in the insurance; it is now a debit in prepaid expenses.
Representing a Temporary short-term asset
1. 4) Prepaid expenses the four hundred is moved to the profit or loss account
So, the amount was a credit in the insurance its now a debit it in the profit or loss
account
2) In the statement of financial position after the adjustments
The 2 thousand is indicated as payments under current assets.
3.1) ADJUSTMENT REVERSAL OF PREPAID EXPENSES ON THE FIRST
DAY OF THE NEXT FINANCIAL YEAR
beginning of next financial year, a totally new set of journals, ledger accounts, will
be created. Only the balance sheet accounts have balances in general ledger for the
new year because all nominal accounts closed off to the profit or loss account end
of the previous fiscal year.
3.2) The temporary asset account will be closed off to the new insurance
account The insurance account will be debited because the amount for
insurance is an expense paid for the new financial year
First, do the reversal, insurance and prepaid expenses, and this closes the accounts
off . To transfer prepaid expenses back to the insurance account. this is in the
General journal
3.3) Closing the prepaid expenses acc in the General ledger for the new year
Debit and credit the insurance entry in the prepaid expenses account. Then, move
the amount to the Insurance account and debit it under an entry for prepaid
expense.
4) Accrued expenses
An accrued expense is an expense that relates to the current financial period but is
still unpaid at the end of that period.
4.1 ) Accrued expenses. On 28 February 20.1, the end of its financial year, Xa-
Xa Dealers’ water and electricity account shows expenses of R2 880. But the
February water and electricity account of R360 has not been taken into
account. Because it's still owing at the end of the month.
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