Adjusting Entries

Adjusting entries are recorded at the end of an accounting period to adjust ledger accounts for any changes that relate to the current accounting period but have not been recorded. Most of the transactions which are recorded adjusting entries are not spontaneous but are spread over a period of time.all journal entries recorded at the end of a period are adjusting entries. For example, an entry to record a purchase on the last day of a period is not an adjusting entry.


Adjusting entries are of following types:

• Accrued revenues (also called accrued assets) are revenues already earned but not yet paid or recorded.

                  accrued items are:

·                                         Salaries Payable

·                                         Interest Payable

·                                         Income Tax Payable

·                                        Unbilled Revenue

• Unearned revenues (or deferred revenues) are revenues received in cash and recorded as liabilities prior to being earned.

                    deferred items are :

                                                    Prepaid insurance

                                                    Prepaid rent

• Accrued expenses (also called accrued liabilities) are expenses already incurred but not yet paid or recorded.
• Prepaid expenses (or deferred expenses) are expenses paid in cash and recorded as assets prior to being used.
• Other adjusting entries include depreciation of fixed assets, allowance for bad debts, and inventory adjustments.

STATEMENT OF CASH FLOW

Cash flow statement may provide considerable information about what is really happening in a
business beyond that contained in either the income statement or the balance sheet.  Analyzing
this statement should not present an intimidating task, instead it will quickly become obvious that
the benefits of understanding the sources and uses of a company’s cash far outweigh the costs of
undertaking some very straightforward analyses.

The Cash Flow Statement is divided into three distinct sections:

• Cash flow from operations
• Cash flow from investing activities
• Cash flow from financing activities

Statement of Cash Flows   

       

Cash Flow from Operating Activities 

Net Income  XXX,XXX 

Adjustments to reconcile net income to net 

     cash provided by operating activities: 

     Depreciation and amortization  XX,XXX 

     Changes in other accounts affecting operations: 

       (Increase)/decrease in accounts receivable  X,XXX 

       (Increase)/decrease in inventories  X,XXX 

       (Increase)/decrease in prepaid expenses  X,XXX 

       Increase/(decrease) in accounts payable  X,XXX 

       Increase/(decrease) in taxes payable  X,XXX 

     Net cash provided by operating activities  XXX,XXX 

    

Cash Flow from Investing Activities 

     Capital expenditures  (XXX,XXX) 

     Proceeds from sales of equipment  XX,XXX 

     Proceeds from sales of investments  XX,XXX 

     Investments in subsidiary   (XXX,XXX) 

       Net cash provided by investing activities  (XXX,XXX) 

    

Cash Flow from Financing Activities 

     Payments of long-term debt  (XX,XXX) 

     Proceeds from issuance of long-term debt  XX,XXX 

     Proceeds from issuance of common stock  XXX,XXX 

     Dividends paid   (XX,XXX) 

     Purchase of treasury stock  (XX,XXX) 

      Net cash provided by financing activities  (XX,XXX) 

    

    Increase (Decrease) in Cash  XX,XXX

IAS 16 Property , Plant and Equipment

The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment.

Property, plant and equipment are tangible items that:

(a) These items are  held for use in the production or supply of goods or services, for rental to others, or for administrative purposes;

(b) Expected to be used during more than one period.

The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: 

(a) It is probable that future economic benefits associated with the item will flow to the entity; and

(b) The cost of the item can be measured reliably.

Elements of Cost:

-          Purchase price + (Import duties + Non refundable taxes) - (Trade Discounts + Rebates)

-          Directly attributable costs.

-          Initial estimate of the cost of dismantling and removing the item and restoring the site in which it is located.

Costs that are not Costs of Property, Plant & Equipment:

-          Costs of opening new facility;

-          Costs of introducing new product or service;

-          Costs of conducting business in new location or with new class of  customer;

-          Administration and other general overhead costs;

-          Costs incurred in using or redeploying an item;

-           Amounts related to certain incidental operations

Example:

ABC & Co., is installing a new plant at its production facility. It has incurred these costs:

-         Cost of the plant Rs. 250,000.

-         Initial delivery and handling cost Rs. 20,000.

-         Cost of site preparation Rs. 60,000.

-         Consultants used to advice on the acquisition Rs. 70,000.

-         Interest charges paid to supplier for deferred credit Rs. 20,000.

-         Estimated dismantling cost to be incurred after 7 years Rs. 30,000.

-         Operating losses before commercial production Rs. 40,000.

     Find out the costs to be capitalized as per IAS-16? 

Solution:

-         Cost to be capitalized include:

-         Cost of the plant Rs. 250,000.

-         Initial delivery and handling cost Rs. 20,000.

-         Cost of site preparation Rs. 60,000.

-         Consultants used to advice on the acquisition Rs. 70,000.

-         Estimated dismantling cost to be incurred after 7 years Rs. 30,000.

-         Total Cost = (250,000 + 20,000 + 60,000 + 70,000 + 30,000) = 430,000.

-         Interest charges can be capitalized as per allowed alternative treatment of IAS-23 Borrowing Cost.

BANK RECONCILIATION STATEMENT

                                                  INTRODUCTION:

When you receive your bank statement each month, you will notice that the ending balance per the bank statement does not match the ending balance per the general ledger's cash account.For example, checks written and recorded in the general ledger on the last day of the month did not clear the bank until the third or fourth day of the following month.If it does not agree it means that either some cash transactions have been omitted from the cash book or an amount of cash has been stolen or lost. The reason for the difference is ascertained and cash book can be corrected.  the bank balance as shown by the cash book and bank balance as shown by the bank statement seldom agree.a statement is prepared called bank reconciliation statement to find out the reasons for disagreement between the bank statement balance and the cash book balance of the bank.

some differences may occur in reconciliation statement such as :


                                           Adjusting the Balance as per Bank
1-outstanding checks:
                           Outstanding checks represent checks written by the business and recorded in the general ledger but not cleared by the bank.
2-Deposits in Transit:
                          When deposits are made at the end of the month, the bank may not post the deposit to your account until the next month.

3-Bank errors:
                          These mistakes made by the bank.Bank errors could include the bank recording an incorrect amount, entering an amount that does not belong on a company's bank statement, or omitting an amount from a company's bank statement. 


                                           Adjusting the Balance per Books
1-Bank service charges:
                          The  fees deducted from the bank statement for the bank's processing of the checking account activity .

2- NSF check & fees:
                         An NSF check is a check that was not honored by the bank of the person or company writing the check because that account did not have a sufficient balance. As a result, the check is returned without being honored or paid.



so the  the Bank Reconciliation Statement explains the difference between cash reported on bank statement and cash balance in depositors accounting records.

International Accounting Standard 2

Inventories

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Objective:

• The objective of IAS 2 is to prescribe the accounting treatment for inventories.
• It provides guidance for determining the cost of inventories and for subsequently recognizing an expense, including any write-down to net realizable value.
• It also provides guidance on the cost formulas that are used to assign costs to inventories.

Scope:
The standard is applicable to inventories other than the following:

• Work in progress arising under construction contracts, including directly related service contracts.
• Financial instruments.
• Biological assets related to agricultural activity and agricultural produce at the point of harvest (to be measured at their net realizable value)

Definition:

The following terms are used in this Standard with the meanings specified:

Inventories are assets:

• Held for sale in the ordinary course of business
• In the process of production for such sale
• In the form of materials or supplies to be  consumed in the production process or in the rendering of services.

Net realisable value:

It is the estimated selling price less the cost to complete and sell.

Fair value:

Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction.
Measurement of inventories:
Inventories shall be measured at the lower of cost and net realisable value.
Cost of inventories:

• Costs of purchase (including taxes, transport, and handling) net of trade discounts received.
• Costs of conversion (including fixed and variable manufacturing overheads).
• Other costs incurred in bringing the inventories to their present location and condition.

Costs not to be included in the inventory cost:

• Abnormal losses of material, labour etc.
• Storage costs unless these are necessary in the production process.
• Administrative overheads that are not to bring the inventories at present location or condition.
• Selling costs.

Cost of inventories of service providers:

Only the labor cost and the cost of personnel directly involved in providing services.

Cost of agriculture produce:

Agricultural produce harvested from the biological assets is measured as fair value less estimated point of sale cost at the point of harvest.

Techniques of measurement of cost:

• Standard cost method
• Retail method

Cost Formulas:

• Items which are not ordinarily interchangeable should be valued at individual cost basis.
• For interchangeable items, FIFO (First In First Out) and WACO (Weighted Average Cost)are benchmark treatment.

Write-Down to Net Realisable Value:

• NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale.
• Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs.
• Any reversal should be recognized in the income statement in the period in which the reversal occurs.

Recognition as an expense:

The inventory cost should be recognized as an expense in the period in which their revenue is recognized  (IAS 18).

Adjusting Entries ..Case 4.1 "Financial and Managerial Accounting by Williams et all 15e"

A.  No adjusting entry is required because the revenue has already been earned prior to the ending period.

B : 3 months revenue was collected in advance on December 1<sup>st

Effect :</sup> decrease the liability, increase the revenue earned and increase in owner’s equity.

C :This entry is required to record the revenue which we have earned
Effect : increase in asset, increase the revenue and increase in owner’s equity.

D : No adjusting entry is required because insurance policy will start from 2, January 2010 and           payment of unexpired insurance has already been recorded .


E : this entry entry is required because the depreciation of asset recorded 
Effect : it increase  the expense , decrease in revenue and  the owner’s equity also decreases .


F  : this entry required because salaries have been earned by employes but not yet have been recorded.
Effect : it will increase liabilities decrease in revenue and  owner’s equity also decrease.

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