Chapter 15

Accruals and prepayments of income
Bad debts recovered
Provision for doubtful debts
Provision for depreciation of non current assets 

  • Created by: Melonball
  • Created on: 26-04-14 15:12

Accruals and Prepayments of Income

An accrual of income is an amount due in an accounting period which has not been recieved at the end of that period.

In the final accounts, accrual of income is:

  • Added to the income in the trial balance before listing it in the income statement.
  • Shown as a current asset in the balance sheet.

A prepayment of income is a payment received in advance of the accounting period to which it relates.

In the final accounts, prepayment of income is:

  • Deducted from the income in the trial balance before listing it in the income statement.
  • Shown as a current liability in the balance sheet.

The objective of taking note of accruals and prepayments of income is to ensure the amount of income stated in the income statement related to the period covered by that account. This is the application of the accruals concept.

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Bad debts recovered

A bad debt recovered is when a former trade receivable, whose account has been written off as a bad debt, makes a payment.

The book keeping entries for this is:
Debit cash/bank account with the amount of the recovery
Credit bad debts recovered account.

The effect on the final accounts

  • In the income statement,  the amount recovered is considered income and is added to gross profit with the heading 'bad debts recovered' 
  • In the balance sheet, the amount recovered is added to current asset bank account
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Provision for Doubtful Debts

A provision for doubtful debts is an estimate by a business of the likely percentage of its trade receivables which may go bad during any on accounting period.

How to create the account example; If 10% of trade receivables of £10,000 is estimated to go bad:

£10,000 x 10% = £1000

debit income statement
credit provision for doubtful debts account

In the final accounts :

  • Listed in the income statement as an expense decribed as ' increase in provision for doubtful debts'
  • Deducted from the trade receivable's figure in the current asset section of the balance sheet. 
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Adjustments to provision for doubtful debts

An increase in the provision: Debit income statement
                                           Credit provision for doubtful debts

in the final accounts:

  • Listed in the income statement as an expense described as 'increase in provision for doubtful debts'
  • Shown in the balance sheet where the amount of the increase is added to the existing provision which is deducted from the trade receivable's figure

A decrease in the provision: Debit provision for doubtful debts
                                          Credit income statement

In the final accounts:

  • Added to gross profit in income statement and decribed 'reduction in provision for doubtful debts'
  • Shown in the balance sheet at the lower amount=existing provision - amount of decrease 
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Minimising the risk of bad debts

  • Ask for references for unknown buyers from other businesses they've traded with
  • A credit limit should be established and not exceeded unless approved
  • Invoices should be sent promptly
  • If customers don't pay up, the business should chase the debt promptly 
  • Trade discounts offered to encourage payments to be made faster 
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Depreciation of Non Current Assets

Depreciation is a measure of the amount of the fall in value of non current assets over a period of time.

Straight line method: A fixed percentage is written off the original cost of the asset each year.
 Cost of asset - estimated scrap value/ sales proceeds
Number of years' expected use of asset 

Reducing balance method: A fixed percentage is written off the reduced balance each year. The reduced balance is the cost of the asset less depreciation to date 

Original cost                                     £2000
2001 depreciation: 33% of 2000          £667
Value at end of 2001                        £1,333
2002 depreciation: 33% of 1333         £444
Value at the end of 2002                   £889                    and so on 

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Depreciation and the Final Accounts

Income statement: It is listed among the expenses listed as, for example, 'depreciation: machinery £400

Balance sheet:  Each class of NCA should be shown at cost price less the amount of provision for deprecaiation to date. The resulting figure is the net book value of the NCA.

Balance sheet extract as at december 2001
                                                                    £                     £                                    £
                                                                 cost         provision for depreciation    net book value

Non current assets
Machinery                                                 2000                  400                                1600
Vehicle                                                     5000                  1000                               4000

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Sale of Non Current Assets

When a NCA is sold or disposed, it is necessary to bring together:

  • The original cost of the NCA
  • provision for depreciation over the life of the NCA
  • sales proceeds

example: cost of machine       £2000             The disposals account looks like....
              depreciation to date  £1600
                                             --------              ------------------------------------------------------------------------
              net book value          £800                machinery     2000     l prov'n depreciation    1200
              sales proceeds         £600                                                l    bank                      600   
                                             ---------                                              l income statement      200
              loss on sale              £200                                   --------     l                                --------
                                                                                        2000     l                                 2000

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