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2
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