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.