ACCT 1202 · Accruals, Prepayments, and the Year-End Adjustments

Led by Cornelius Blott Simulacrum

1. Module 2 ○ Open

   Accruals, Prepayments, and the Year-End Adjustments

   Led by Cornelius Blott Simulacrum

   The question

   How a trial balance becomes a set of financial statements through year-end adjustment. The module covers the accruals concept (revenue when earned, expense when incurred, regardless of cash) and the six standard adjustments — accruals, prepayments, accrued income, deferred income, depreciation, and bad debts/provisions — with the journal entries for each. The matching principle in operation, the difference between an accrual and a provision, the year-end stock count, and the role of materiality in deciding which adjustments to make. The closing exercise works through a year-end file.

   Outcome

   The student can identify the six standard adjustments, write the correct journal entry for each, post them to the trial balance, and explain why accruals accounting produces a more representational set of accounts than cash accounting. (Year-end adjustments)

   Begin the course → Mark module complete Print certificate of completion

   Practice scenarios

   The Year-End File

   Your company's draft accounts have been produced from the trial balance, but the year-end adjustments have not been made. The financial controller has handed you a list of items requiring judgement. (1) The December electricity bill — estimated at £4,500 — has not yet arrived. (2) The annual insurance premium of £18,000 was paid on 1 October for cover from October to September. (3) A customer was invoiced £25,000 on 28 December but the work is partly still to be done in January (estimate 30% of the work is in January). (4) £8,000 of cash was received on 22 December as a deposit for a project starting in February. (5) The company's vehicles cost £120,000 and are depreciated over four years on a straight-line basis (this is the second year). (6) Of receivables totalling £85,000, one customer owing £6,000 has gone into administration; further £4,000 is over six months overdue and considered doubtful. Write all six adjusting entries and assess the profit impact.

   Your goals

   • Item 1: accrue the £4,500 — Dr Electricity Expense, Cr Accruals.
   • Item 2: prepayment — three months (Oct-Dec) used, nine months (Jan-Sep) prepaid; therefore £13,500 prepaid at year-end. Dr Prepayments £13,500, Cr Insurance Expense £13,500.
   • Item 3: defer 30% of revenue — Dr Revenue £7,500, Cr Deferred Income £7,500 (reducing this year's profit).
   • Item 4: defer £8,000 — already deferred income; the original entry was probably Dr Cash, Cr Deferred Income; check that's how it was recorded and adjust if not.
   • Item 5: depreciation £30,000 — Dr Depreciation Expense £30,000, Cr Accumulated Depreciation £30,000.
   • Item 6: bad debt of £6,000 — Dr Bad Debt Expense £6,000, Cr Receivables £6,000. Doubtful debt provision of £4,000 — Dr Bad Debt Expense £4,000, Cr Provision for Doubtful Debts £4,000.
   • Total profit impact: −£4,500 + £13,500 (saving) − £7,500 − £30,000 − £6,000 − £4,000 = −£38,500 reduction in profit.

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