MAKERERE UNIVERSITY BUSINESS SCHOOL

PROGRAMME:

MSC. ENTRPRENEURRSHIP

COURSE UNIT:

ACCOUNTING

ACADEMIC YEAR:

2007/2008

YEAR:

TWO

FACILITATOR:

MR MATAMA

NAME:
ODHIAMBO ANITA AKINYI

REG NO:
MUBS07/02/7102

SIGN

Task;
Entrepreneurs are always bothered by end of year adjustments in accounting.
Things like depreciation, bad debts closing stock among others disorient the
entrepreneurs focus to attain profits.
As a masters student with a bias in entrepreneurship, with clear knowledge of
accounting, show the validity of this statement, clearly outlining several steps that
are taken before financial statements are extracted.

Regardless of the type of business or the accounting system used, it is not

possible to keep all accounts up to date at all times. At the end of each financial
year, certain accounts must be updated by adjusting entries. At the end of the
period, the accountant prepares the financial statements. This end of period
process begins with the trial balance that lists the accounts and their balances
after the periods transactions have been recorded in the journal and posted to
the accounts in the ledger.
The trial balance amounts are incomplete because they omit certain revenue and
expense transactions that affect more than one accounting period. After adjusting
entries are recorded and affected accounts in the trial balance adjusted, the
accounts will reflect the status of the business and financial statements can then
be prepared. The major adjustments that are usually made include the following.
Bad and doubtful debts
Some debtors will always fail to honor their obligations within the credit period or
even fail to pay totally. A provision should be made for those receivables or debts
that have a high possibility of not being collected. Those that become
uncollectible should be written off. Bad and doubtful debts are a business risk
and are treated as expenses. Provision for bad debts should be created for all
those accounts that have a high possibility of not being collected
For example, a company has debtors totaling 10,000,000/= but 10% of them are
doubtful and are likely not to pay. A provision for bad and doubtful debts should
be created by making the following entry.
Dr Bad and doubtful debts expense A/C

500,000

Cr Provision for bad and doubtful debts A/C

500,000

In some cases, the debtors who were once doubtful truly become bad and their
amounts are uncollectible. Their accounts have to be written off. It is written as
follows.
Dr. Provision for bad and doubtful debts A/C
Cr. Debtors A/C

500,000
500,000

Direct write off of a bad debt

For small debtors amounts or receivables, there is no need to create a provision
for bad debts, a direct write off can be made to the profit and loss A/C. For
example, when sales are done on credit for an amount of 10,000/= is defaulted
and is not likely to be paid. The accounting entry to write off the small amount is
as follows:
Dr. Profit and Loss (P&L) A/C (bad debts)
Cr.

10,000

Debtors A/C (johns A/C)

10,000

Increasing the provision for bad debts

At times, the provision for bad debts might have to be increased beyond the
current provision. For example, if the current provision for bad debts is
2,000,000/= but has to be increased to 3,000,000/=
The accounting entry is as follows:
Dr.

Bad debts expense A/C

Cr.

1,000,000/=

Provision for bad debts A/C

1,000,000/=

The accounting entry is performed with the difference i.e. 3,000,000 -2,000,000 =
1,000,000/=
Decreasing the provision for bad debts
If debtors start paying and there is little doubt about the amounts being collected,
a provision for bad debts which was once high can be reduced. For example, a
provision of 5,000,000/= had been made against bad debts, the provision is now
to be reduced to 3,000,000/=
Accounting entry is as follows;
Dr.

Provision for bad debts A/C

Cr.

Profit and loss A/C (reduction in bad debts provision)

2,000,000
2,000,000

Collecting a bad debt that had been written off

An account that had been written off as uncollectible, or bad can be collected at a
future date may be after two or more years. For instance, a business had written
off a bad debt of 10,000,000/= and is paid after it had been written off by cheque.

The accounting entries to record the above are as follows

The first step is to reinstate the debtor and the following entry is made:
Dr.

Debtors A/C

Cr.

10,000,000

Bad debts recovered A/C

10,000,000

The second step is to record the receipt of a cheque using the following entry
Dr.

bank A/C

Cr.

10,000,000

Debtors A/C (Joseph A/C)

10,000,000

The third step is to close the bad debts recovered A/C to the profit and loss A/C
by using the following entry:
Dr.

Bad debts recovered A/C

Cr.

Profit and loss A/C

10,000,000
10,000,000

Prepaid expenses
These are expenses paid in advance. Adjustment must be made for expenses
that are paid in one financial year but benefit the following financial year.
For instance, rent of 3,000,000/= cash was paid on 1 st January 1999 to cover a
period to 31st march 2000 (15 months). Record the adjusting entry for the prepaid
rent at the end of the financial year on 31 st December 1999.
Monthly rent payment = 3,000,000
15
= 200,000
Since the financial year is, 12 months and the rent had been paid for 15 months,
3 months rent spills to the following financial year and is called prepaid rent.
Prepaid rent = 200,000 x 3 = 600,000
Adjusting entry for the prepaid rent is as follows
Dr.

Prepaid rent A/C

Cr.

Rent A/C

600,000
600,000

Prepaid rent of 600,000 will appear in the balancing sheet as an asset while in
the income statement, the rent expense will be 2,400,000 i.e. 3,000,000
600,000

Accrued Expenses
Expenses incurred in one financial year but not paid until the next financial year
is called accrued expenses. They are current liabilities. For instance, a
companys financial year ends on 31st December. During a particular financial
year, December salaries totaling 4,000,000 could not be paid until January the
following year. Record the adjusting entry at the end of the financial year for the
accrued salaries.
Dr.

Salaries A/C

Cr.

4,000,000

Salaries payable A/C

4,000,000

Instead of using the word salaries payable, accrued salaries could have been
used.
Income received in advance (prepaid income)]
Some businesses receive income before its earned. For instance, it is a common
practice in Uganda for property owners to ask tenants to pay rent in advance for
2 years. Adjustments must be made for that income which was received but
services were not offered to the customer. Unearned income is treated as a
current liability in the balance sheet.
For example a tenant was made to pay rent of 1,800, 000/= cash for a period of 1
years.
journalize the entries when the rent was paid
journalize the adjusting entry at the end of the financial year (first 12 months)
Dr. Cash A/C

1,800,000

Cr. Unearned rent income A/C

Monthly rent payment = 1,800,000
18
= 100,000
Rent earned for the year = 100,000 x 12
= 1,200,000

1,800,000

The following entry is then performed to recognize the income which was hitherto
unearned but has now been earned.
Dr. Unearned rent income A/C
Cr

1,200,000

Earned rent income A/C

1,200,000

Accrued income
Income earned in one financial year but not received until the following financial
year is called accrued income. It is treated as a current asset in the balance
sheet. For instance, when services are offered to a client but the client could not
pay in the financial year and promised to pay in the next financial year. Record
the adjusting entry for the fees which accrued at the end of the financial year.
Dr.

Consultancy fees receivable A/C (Debtors A/C)

Cr.

Consultancy fees (revenue / income) A/C

3,000,000
3,000,000

Inventory adjustments
The inventory on the accounting system may differ from the physical inventory
taken at year-end. Inventory variance adjustments are required to bring the
inventory quantities and money values in balance with the physical inventory.
If variances exist, entries to the following unallocated areas will be required:
End-of-year Inventory Adjustments for Field Supplies, End-of-year Inventory
Adjustments for Administrative Supplies and End-of-year Inventory Adjustments
for Shop and Equipment Supplies.
The following steps are taken to determine the businesss inventory variances:

Take a physical count of all inventory items.

Calculate the money value for each item; physical count multiplied by unit
price.

Compare the calculated money values and quantities to the amounts on

the accounting system.

Adjust any items that differ.

Salaries and wages payable

Salaries and Wages Payable represent the amount owed to the businesss
employees for work performed in the current year and paid in subsequent years.
This liability may need to be adjusted to match the payable amount provided by
the accounting Office at year-end.
Accounting Entry Salaries and Wages Payable is too high
Debit Account: (liability) Salaries and Wages Payable
Credit Account: (expense) Unallocated Salaries/Wages Adjustment Account
Accounting Entry Salaries and Wages Payable is too low
Debit Account: (expense) Unallocated Salaries/Wages Adjustment Account
Credit Account: (liability) Salaries and Wages Payable
Depreciation
All fixed assets except land, depreciate. Depreciation is reduction in value of an
asset due to wear and tear. In accounting, depreciation is defined as the
allocation of the cost of the fixed asset to the years in which benefits is expected
from the use of that asset.
At the end of each financial year, depreciation must be provided on fixed assets.
A business that does not provide for depreciation will overstate the reported net
profit and therefore tax liability and will not show an accurate balance sheet
position. Depreciation is, as any other operating expense though it does not
directly involve cash outflow. It is subtracted from revenues or incomes in arriving
at net profit and accumulated depreciation is subtracted from the cost of the
asset to derive book values.
The entry made when providing for depreciation is as follows:
Dr.
Cr.

Depreciation expense A/C

Accumulated depreciation A/C

xxxx
xxxx

Corporation tax
If draft accounts of the business suggest that net profit is earned, a provision
must be made for corporation tax to be paid.
The following entry is made when providing for corporation tax to be paid.
Dr.

Profit and loss (provision for corporation tax) A/C

Cr.

xxx

Corporation tax payable

xxx

Proposed dividends
Dividends are a reward to shareholders, if profits are made some of those profits
must be appropriated to shareholders as dividends. The following entry is made
when the directors propose to pay dividends.
Dr.
Cr.

P& L appropriations A/C (proposed dividends)

Proposed dividends payable A/C

xxxx
xxxx

Conclusion:
A work sheet is an extension of the trial balance. It includes the unadjusted trial
balance, adjustments, adjusted trial balance, income statement and balance
sheet. The completion of a work sheet provides assurance that all the details of
the end of period accounting procedures have been properly brought together.
The work sheet then serves as a source from which formal financial statements
are prepared. It shows debts and credits in the income statement and balance
sheet.
One purpose of the adjusting process is to measure business income, so each
adjusting entry affects at least one income statement account. The other purpose
of the adjusting process is to update the balance sheet account. Therefore, the
other side of the entry-debit or credit-affects an asset or a liability. No adjusting
entry debits or credits cash because the cash transactions are recorded at other
times. The end of period adjustment process is reserved for non-cash
transactions that are required by accrual basis accounting.