![]() However, like all the other examples above, the reason we make adjustments for prepayments and accruals is because of the concept.įor example, when we pre-pay an expense there is a mis-match between the financial period and the invoice period. The fact that one of our practical year-end adjustments has the same name as the theory is confusing. Adjustments for Pre-payments and Accruals Therefore, we split the capital expenditure up into five depreciation charges and match one a year for the five years we expect to generate income.Īgain it doesn’t matter that the original invoice was paid in full during the first year. One year’s worth of expense does not match five years’ worth of income. If we pay for the machinery after 30 days, the full cost of the expense is deducted from our bank account in the first financial year. If we buy machinery that will manufacture products for us for five years, we’ll be able to generate five years’ worth of sales income from the acquisition. We’ve probably already paid for it but that doesn’t matter. We’ve matched the expense to the year it generated sales income. Therefore it’s deducted as closing inventory at year-end and added on as opening inventory the next year. We adjust the inventory on the SPL as we can’t match what is left in the stock room at year-end to this year’s sales because we haven’t sold it. The accruals concept is responsible for the majority of year-end adjustments: Closing inventory ![]() Practice: The banking date of a transaction does not matter, other than to indicate if it is in the right period or requires adjusting. Theory: Regardless of when the money is paid or received. Practice: The figures on our financial statements have to be for the accounting period i.e. We can only include ‘Expenses’ in the bottom half that have been spent to generate the ‘Net Sales’ at the top. Practice: We match up the accounts on the Statement of profit or loss (SPL). Theory: Matching expenditure incurred with income generated Matching income generated with expenses incurred, to a financial period, regardless of when the money is paid or received. The accruals or matching concept is a classic example as so many students find it hard to understand. In fact, I believe there’s too much to remember when it comes to accounts, so the only way to be successful is to understand what you’re doing and use the theory to work out the practical application. But I’m passionate about the fact that in order to be competent accounting technicians, we need to understand why we do what we do. Have you ever made a statement like either of these? I’ve heard them repeatedly over my years as an AAT tutor, especially when we reach the theoretical part of the syllabus. “I just need to know how to do it not why.” “I skipped that chapter in the textbook as it was all words.”
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |