Financial Statements

Accounting Adjustments
 Accounting concept for adjustments
The accounting concept

The underlying accounting concept which

apply to year-end adjustment is Accruals basis
(matching rule).
 Accruals basis (matching rule)
continue
Accruals Basis
Which state that revenue and costs should be
recognised in the period in which they are
incurred regardless of whether cash or cash
equivalent is received or paid.
 Accounting Adjustments

When financial statements are prepared

incorporating adjustments they become much
comprehensive as calculations will have to be
done to get the amounts which have to be
posted to each set of financial statement.
 Adjustments continue
This will involve the following adjustments:
Accruals;
Prepayments;
Depreciation, and
Provision for bad debts
 Accruals
Accruals

Accruals mean expense or income incurred

but has not yet been paid. This can be
applicable to income and expenses, let us see
how it will be applied
 Accrued expenses

This will be defined as: amount of expenses that

have been used by the organisation but have not
yet been paid until the end of the financial period.

(Example) Water &Electricity: Let us assume the

total amount for water and electricity for the whole
year is N$ 10 000, total amount paid for is only N$
8000. In this case it means that there is a
difference; as the amount paid for that expenses is
only N$ 8000.
 Accrued expenses continue
The result will mean that:

Total amount paid N$8 000

Total amount incurred N$10 000
Difference = Accrued expenses N$2 000
In other word the business paid less than
what they were supposed to have paid for
water & electricity.
 Accrued income
Accrued income

This will be defined as: Income that the

business is entitled to but have not yet
received the money until end of the financial
year.
 Accrued income continue
(Example) Interest received: Lets assume that
the total amount which the business
supposed to get for interest received on an
investment for the whole year is N$3 500.
What was received for that period is only N$2
000. In this case this means that there is a
difference as the amount received for the
income is only N$2 000.
 Accrued income continue
The result will mean:

Total amount received N$2 000

Total amount incurred N$3 500
Difference = Accrued income N$1 500

In other words, this is basically saying that the

organisation received less than what it was supposed
to have received.
 Prepayments
Prepayments

Prepayment means is expenses or income that

is paid in advance. This can be applicable to
both income and expenses, let us see how it
will be applied.
 Prepaid expenses
Prepaid expenses
This will be defined as: amount of an expense
that have been paid in advance by the
organisation, but has not yet been incurred
during the financial period under review.
(Example) Rent expenses: Let us assume the total
amount for rent for the whole year is N$6 500.
The total amount paid for that is N$7 000. In this
case it means that there is a difference as the
amount paid for the expense is N$7 000
 Prepaid expenses continue
The result will mean:

Total amount paid N$7 000

Total amount incurred N$6 500
Difference = Prepaid expenses N$500

In other word this is basically saying that the

organisation paid more than what it was supposed to
have paid.
 Prepaid income/ income received in
advance
Prepaid income

This is defined as: an amount of income that

has been received in advance by the
organisation, but has not yet been incurred
until year end
 Prepaid income/ income received in
advance continue
(Example) Commission received: Let us
assume that the total amount for commission
for the whole year is N$1 200. The total
amount received up-to-date is N$1 400. In this
case it means that there is a difference as the
amount received for that income is only N$
1400.
 Prepaid income/ income received in
advance continue
The result will mean:

Total amount received N$1 400

Total amount incurred N$1 200
Difference = Prepaid income N$200

In other word, this is basically saying that the

organisation received more than what it was
supposed to have received.
 Depreciation
Depreciation

Depreciation is part of year end adjustment, is

defined as follows: Decrease in value of assets
due to wear and tear, decay and decline in price.

Depreciation affects non -current assets to the

extent that some non- current assets own by
business need to be depreciated.
 Depreciation continue
E.G Motor van, equipment, computers and so
on. Depreciation is regarded as an expense in
the accounting records of an organisation.
 Methods of Depreciation calculation
Method of calculating depreciation

There are two common methods that can be

used to calculate depreciation, they are:
1. Straight line method and
2. Reducing balance method (Diminishing
balance method).
Methods of Depreciation calculations
continue
Straight line method

Sometimes also called the fixed instalment

method, the number of years used is
estimated. The cost, less the estimated
disposal value, is then divided by the number
of years to give the depreciation charge each
year. This means that depreciation charged
will be constant each year.
 Straight line method continue..
Formula

Cost Residual value or Cost price

X Rate% = Depreciation
Number of years
= Depreciation
Residual value is also known as scrap value or
disposal value.
 Reducing balance method
Reducing balance method
By this method a fixed percentage of
depreciation is deducted from the cost price in
the first year.
In the second or later years the same
percentage is taken of the reduced balance
(cost less total depreciation already charged).
Depreciation charged each year decrease from
one year to another.
 Reducing balance method continue
By this method a fixed percentage of
depreciation is deducted from the cost price in
the first year.
In the second or later years the same
percentage is taken of the reduced balance
(cost less total depreciation already charged).
Depreciation charged each year decrease from
one year to another.
 Reducing balance method continue
Formula

Cost Accumulated depreciation = NBV X

Rate%
 Provision for bad debts/doubtful
debts
Provision for bad debts/ doubtful debts

Provision for bad debts is an estimate that is made for

the value of debtors who are unlikely not be able to
pay.
This is not the same as bad debts because a bad debt is
the actual amount that is known that is not going to be
paid.
Provision for bad debts is calculated every year to
determine the amount of debtors that are probably not
going to pay using a fixed percentage on the
outstanding debtors.
 Provision for bad debts/doubtful
debts
This will then be compared between last year
provision and this year provision and then the
difference will either be increase or decrease
in provision for bad debts. An increase in
provision for bad debts is an expense while a
decrease in provision for bad debts is an
income. Prudence concept apply to provision
for bad debts.