Assignment 2

Harnarine Naraindatt

R2308D16947324

Financial Accounting I (57849)

UU-ACG-1000-ACCA-ZM

December 03, 2023

Exercise 1

Accruals & Prepayments

a) Explain what accruals are and give an example.

Accruals can be defined as the recognition of expenses in financial statements before the

actual cash transaction occurs. They are the adjustments made to reflect the economic

reality of a transaction regardless of when the cash is received or paid. For instance a

business may incur expenses for services received or goods consumed but has not yet

made the payment. By recording these expenses as accruals the company reflects its

financial obligations accurately.

Example of Accruals

A consulting company ABC Consultants provides services to its clients. On December 30th

2022 ABC Consultants completes a project for a client but hasn't yet received the payment.

According to accrual accounting principles ABC Consultants should recognize the revenue

earned from the project in its financial statements for the year ending December 31 st 2022

even though the cash hasn't been received.

In this case ABC Consultants would record the revenue as an accrual in the form of accounts

receivable. This accrual reflects the economic benefit the company expects to receive from

the completed project.

b) Explain what prepayment are and give an example.

A prepayment refers to an expense that is paid in advance before it is actually incurred. It

occurs when a company pays for goods or services that will be used or consumed in the
 future. Prepayments will be recorded as an asset on the balance sheet until the

corresponding expense is recognized.

Example of Prepayment

A company called ABC Inc. rent an office space to company XYZ. The annual rent is $12000

payable in advance at the beginning of each month. In January XYZ pays the entire amount

of $12000 to the landlord. Since the payment is made in advance it is classified as a

prepayment. XYZ records the prepayment as an asset on its balance sheet under the prepaid

rent account. Throughout the year XYZ will recognize a portion of the prepaid rent as an

expense each month. For instance in January $1000 will be recognized as an expense

reducing the prepaid rent asset by that amount. This process continues until the prepayment is

fully expensed by the end of the year.

c) Preparation of the Accounts

Electricity
Electricity Expense $6500 Profit & Loss Account $7000

Accrued Electricity $500

$7000 $7000

Water
Water Expense $1700 Profit & Loss Account $2000

Accrued Water $300

$2000 $2000
 Salaries
Salary Expense $180000 Advance Salary $1500

Profit & Loss Account $178500

$180000 $180000

Audit Fee
Accrued Audit Fee $5000 Profit & Loss Account $5000

$2000 $2000

Accurals
Balance Sheet $5800 Electricity $500

Water $300

Audit Fee $5000

$5800 $5800

Prepayment
Salary $1500 Balance Sheet $1500

$1500 $1500
 Masha and Bear Inc.

Profit and Loss Account (Extract)

For the year ending December 31, 2018

Expenses

Electricity 7000

Water 2000

Salaries 178500

Audit Fees 5000

192500

Masha and Bear Inc.

Balance Sheet (Extract)

As at December 31, 2018

$ $

Asset

Prepayment

Salary 1500

Liabilities

Accruals

Electricity 500

Water 300

Audit Fee 5000

5800
Exercise 2

Fixed Assets & Depreciation

a) Depreciation charge using the Straight Line Method

Old Asset

Cost of Asset as on 31st July 20X6 $310,000

Rate of Depreciation 25%

Depreciation Charge (310000*25%)

$77,500

New Asset

Cost of Asset as on 1st January 20X7 $79,200

Rate of Depreciation 25%

Depreciation Charge (79200*25%) $19,800

Total Depreciation Charge using Straight Line Method (77500+19800) $97,300

 b) Depreciation charge using Reducing Balance Method

Old Asset

Cost of Asset as on 31st July 20X6 $310,000

Accumulated Depreciation $120,000

Rate of Depreciation 25%

Depreciation Charge (310000-120000)*25% $47,500

New Asset

Cost of Asset as on 1st January 20X7 $79,200

Rate of Depreciation 25%

Depreciation Charge (79200*25%) $19,800

Total Depreciation Charge using Reducing Balance Method (47500+19800) $67,300

Question 3

Uncollectable Accounts

a) The difference between making an allowance for bad debts, and writing off a bad

debt.

When a company anticipates that some of its customers may not be able to pay their

outstanding debts it can choose to make an allowance for bad debts. This involves the

estimation of the expected amount of uncollectible accounts based on historical data,

trends in the industry and the overall economic environment. The amount determined

is to be recorded as an expense on the income statement and a corresponding contra-

asset account usually called "Allowance for Doubtful Accounts" is created on the

balance sheet. This allowance will reduce the carrying value of accounts receivable

and provides a more accurate representation of the net realizable value.

On the other hand when a specific debt is deemed uncollectible it is necessary

to remove it from the accounts receivable balance. This process is known as writing

off a bad debt. The specific customer's account is debited reducing accounts

receivable and the corresponding amount is credited to the allowance for doubtful

accounts. This action will not affect the income statement as the expense was already

being recognized when the allowance was established. Therefore writing off a bad

debt only impacts the balance sheet by reducing the net accounts receivable balance.
b) Journal entry to summarize all accounts written off against the allowance for doubtful

accounts in 2017.

Date Particulars Debit Credit

2017 Allowance for Doubtful Accounts $470,000

Accounts Receivable $740,000

c) Entries to record the $24,000 in accounts receivable which were unexpectedly

collected.

To cancel the bad debt.

Date Particulars Debit Credit

2017 Accounts Receivable $24,000

Allowance for Doubtful Accounts $24,000

To record the cash received.

Date Particulars Debit Credit

2017 Cash $24,000

Accounts Receivable $24,000

d) Adjusting entry on 31 December 2017 to increase the allowance for doubtful accounts

to $80,000.

Date Particulars Debit Credit

2017 Irrecoverable Debt Expense $10,000

Allowance for Receivables $10,000

 Exercise 4

Capital and Revenue Expenditure

Capital /
Expenditure Justification
Revenue

a Purchase of motor car Capital Purchase of a motor car is the capital outlay of
acquiring a non-current asset which will cause future
Expenditur
economic benefit to flow to the organization.
e
It is shown on the Statement of Financial Position as
an asset.
b Claim for a meal Revenue Claim for meals are classified as revenue expenditure
due to its short term effect or applicable for the daily
Expenditur
operation.
e
It is evident on the Income Statement.
c Purchase of shares in a supplier Capital Purchasing of shares from a supplier is considered as
a capital expenditure due of its long term economic
Expenditur
benefits in the form of dividends.
e

d Purchase of a new computer Capital Purchasing a new computer is a capital expenditure

as it enables the entity to use it to generate profits
Expenditur
from it in the long run.
e
It is a fixed asset and will be evident in the Statement
of Financial Position.
e Payment for hotel accommodation Revenue Payments for hotel accommodation are classified as
revenue expenditure reason being an expense
Expenditur
incurred in the cycle of normal business operations.
e
It is shown on the Income Statement as an expense.
f Installation cost for server Capital Installation cost for a server is considered a capital
expenditure due to its association with the initial set
Expenditur
up of the fixed asset. It is a cost that will get the asset
e
ready to work.
 Capital /
Expenditure Justification
Revenue

g Purchase of raw material Revenue Purchasing raw materials will be classified as

revenue expenditure because raw materials are being
Expenditur
used in daily operation of the business.
e

h Repair of motor vehicles Capital Repair of motor vehicles is classified as capital

expenditure since it will extend the useful life of the
Expenditur
asset and will be used to generate long term benefits.
e

i Purchase of new stationery Revenue Purchasing of new stationery has be treated as

revenue expenditure because it will be in use for the
Expenditur
normal operation of the business.
e

j Payment of insurance premium Capital Payment of an insurance premium has be treated as a

capital expenditure due to its long term future
Expenditur
benefits.
e
It will be evident on the Statement of Financial
Position.
k Wages Revenue Wages must be treated as a revenue expenditure
because it is expended for the day-to day and normal
Expenditur
operations of the business.
e

l Purchase of new plot of land Capital Purchase of a new plot of land will be a capital
expenditure because it will be increasing the non-
Expenditur
current assets of the business which will be used to
e
generate income.
It will be shown as an asset in the Statement of
Financial Position.