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By Otto Khatamov

Financial Accounting 2010/11week 4

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Financial Accounting

1. Accruals and prepaymentsExpense:

Prepayments Accrued expenses

Income: Accrued Income Deferred Income

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Financial Accounting

2. Depreciation and disposal of non-current assets IAS 16: Property, Plant and EquipmentDepreciation:

Straight line Reducing balance

DisposalRevaluation

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Accrual Basis

Expense:-Prepayments

- Accrued expenses

Income:-Accrued Income;-Deferred income

ACCRUAL BASIS

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Accrual Basis

EXPENSE

1. Expense paid in advance

= PREPAID EXPENSE

= PREPAYMENTS

2. Expense incurred but not invoiced/paid

= ACCRUED EXPENSE

INCOME

3. Income earned but not invoiced/paid

= ACCRUED INCOME

4. Income received in advance

= DEFERRED INCOME

Matching concept

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The concept that expenses incurred in generating revenue should be matched against the revenue in determining profit or loss for the period

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Prepayments

There are two bookkeeping approaches. 1. Traditional method involves:

a) calculating either expense or prepayment

b) bringing down the prepayment, as an asset, on the expense a/c.

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Prepayments

The amount paid  In respect of the amount prepaid

 D/E  Dr Expense a/c  

Cr Cash a/c   D/E Dr Prepayments a/c  Cr Expenses a/c 

2. Alternative approach

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Accrued expenses

The amount paid  

In respect of the charge (calculated) for the accounting year

 D/E  Dr Expense a/c  

Cr Cash a/c   D/E Dr I&E a/c  Cr Expenses a/c 

Traditional approach

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Accrued expenses

The amount paid   

D/E  Dr Expense a/c (I&E a/c)  Cr Accrued expense a/c (Liability)  

  

Alternative approach

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Property, Plant and Equipment

IAS 16 Prescribes the accounting treatment for PPE.

The principle issues addressed by this standards are: Asset recognition The determination of carrying amount Depreciation charges to be recognised

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Depreciation and Disposal of Non-current assets

Depreciation:-Concept;

- Definitions;- Methods;

-Comparison

Disposals:-Ledger accounting;

-Part exchange.

Revaluations:-Appreciating

-assets

Property, Plant and

Equipment (IAS 16)

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Depreciation Methods There are many methods of calculating depreciation,

generally based on either the passage of time or the level of activity (or use) of the asset: Straight-line; Reducing balance; Activity-based; Sum of years digits Units of production Units of time

Depreciation

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Is an expense (charge) for the year – a debit entry.

D/E     Dr Depreciation expense a/c    Cr Accumulated depreciation a/c

The accumulated depreciation a/c provides the balance which is set off against the asset’s cost in arriving at carrying amount in the statement of financial position

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Comparison of methods:1. Straight line

Advantages Disadvantages- Simplest method  - unrealistic- Constant annual charge does not distort comparison

 - Depreciation charge must cease when end of useful life is reached

- Easy to calculate accumulated depreciation

2. Reducing Balance- Accelerated depreciation expense reflects greater usage of assets in earlier years  - Calculations are more complex - Assets in use are never fully depreciated- No need to separately identify assets

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DisposalsTransfer cost and accumulated depreciation to a disposals account  

Account for the proceeds

 

D/E     Dr Disposals a/c (cost)     

   Cr Asset a/c (cost)   D/E     Dr Cash (or receivable)      Cr   Disposals a/c

     Dr Accumulated depn.     Cr Disposals a/c

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Disposals At the end of accounting period, transfer the profit or loss on disposal (i.e. the balance on the disposals a/c) to the I&E a/c

Profit on Sale Loss on Sale

D/E     Dr Disposals a/c     

   Cr I&E a/c   D/E     Dr I&E a/c      Cr Disposals a/c

   

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FA; aims of lecture 4

Accruals and Prepayments Depreciation and disposals of non-current

assets Any questions?