At the end of the accounting period,
any accruals or prepayments have to be reflected in a firm’s profit and loss
account and its balance sheet. In the case of an accrual, the following
accounting adjustment to the trial balance is required.
any accruals or prepayments have to be reflected in a firm’s profit and loss
account and its balance sheet. In the case of an accrual, the following
accounting adjustment to the trial balance is required.
Debit: Item of expenditure
Credit: Creditor account
A failure to recognize and account
for accrual and prepayments will result in the final account for the period not
providing a true and fair view of the entity performance.
for accrual and prepayments will result in the final account for the period not
providing a true and fair view of the entity performance.
Example
The draft final accounts for James
have been prepared and are shown below; when the draft was checked the
following errors were discovered. Return
outwards ofN3,500 had been omitted.
have been prepared and are shown below; when the draft was checked the
following errors were discovered. Return
outwards of
James – Trading and profit and loss
Account for the ended 30 April 1997
Account for the ended 30 April 1997
Accrued wages of N1,300 had
not been allowed for. Depreciation of motor vehicle (cost priceN6,000
should have been included. The firm’s policy is to provide depreciation at 15
percent, using straight line method.
not been allowed for. Depreciation of motor vehicle (cost price
should have been included. The firm’s policy is to provide depreciation at 15
percent, using straight line method.
a.) You are to prepare a
corrected version of the trading and profit and loss account for the financial
year ended 30 April 1997
corrected version of the trading and profit and loss account for the financial
year ended 30 April 1997
b.) Briefly explain why
adjustment are made to accounts and what accounting concept is illustrated.
adjustment are made to accounts and what accounting concept is illustrated.
Solution
Notes:
i.)
Undertake
the necessary adjustments in accordance with the notes: Return outwards atN3,500
had been omitted. This reduces the purchases for the period byN3,500
Undertake
the necessary adjustments in accordance with the notes: Return outwards at
had been omitted. This reduces the purchases for the period by
ii.)
Accrued
wages ofN1,300 had not been allowed for. The wage bill has to be
increased byN1,300 since the sum was due and payable for the year.
Accrued
wages of
increased by
iii.)
Depreciation
of motor vehicle (cost priceN6,000) should have been included. The
policy of 15 percent depreciation has to be applied to the cost of the
vehicles. Therefore the amount charge is
Depreciation
of motor vehicle (cost price
policy of 15 percent depreciation has to be applied to the cost of the
vehicles. Therefore the amount charge is
900
(N6,000 X 15 percent)
(
a.) The corrected version of
the Trading and Profit and loss Account for the financial year ended 30 April
1997.
the Trading and Profit and loss Account for the financial year ended 30 April
1997.
b.) It is necessary to make
adjustments to account to ensure that the account have been prepared under the
underlying principles and concepts enshrined in SSAP2 to ensure the account
provide a true and fair view of the entity. The accounting concept.
adjustments to account to ensure that the account have been prepared under the
underlying principles and concepts enshrined in SSAP2 to ensure the account
provide a true and fair view of the entity. The accounting concept.
