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Financial Accounting Course Work

Group 3 was asked to describe accruals and prepayments and how they are treated in the books of accounts. The group discussed that accruals refer to outstanding transactions where benefits have been received but payment has not been made, while prepayments refer to payments made in advance of receiving goods or services. The group provided examples of journal entries for accrued expenses and incomes as well as prepaid expenses and incomes. They also explained where these items would be recorded on the income statement and balance sheet.

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27 views

Financial Accounting Course Work

Group 3 was asked to describe accruals and prepayments and how they are treated in the books of accounts. The group discussed that accruals refer to outstanding transactions where benefits have been received but payment has not been made, while prepayments refer to payments made in advance of receiving goods or services. The group provided examples of journal entries for accrued expenses and incomes as well as prepaid expenses and incomes. They also explained where these items would be recorded on the income statement and balance sheet.

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elvis page kamunanwire
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© © All Rights Reserved
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GROUP 3

QUESTION 7
GROUP MEMBERS
1AGABA JUNIOR VU-BCS-2307-0193-EVE
2KAHUNDE SARAH VU-BBA-2307-0457-EVE
3GATCHGANG NHIAL KUOL VU-BHR-2019-1340-EVE
4 ARIENYO SARAH MARY VU-BBA-2307-0854-EVE
5 TEBUSWEKE HOODS VU-BCS-2307-0634-EVE
6 OLUKA AUGUSTINE VU-DTH-2307-1091-EVE
7 AYIBAKU SAM OBASONI VU-BAF-2307-0233-EVE
8 NTALE AMON VU-BBF-2307-0841-EVE
9 AGEU ANTHONY VU-BBA-2307-0194-EVE
Describe the term accruals and prepayments and examine how they are
treated in the books of accounts.

Accruals or accrued expense refer to items for which the business has
enjoyed the benefits but haven’t made the payments for them while accrued incomes are money
received as the consideration for items not provided or services not yet rendered. Can also be called
outstanding or unsettled transactions. Can be either expense or incomes
Accrued Expenses
Dr Expense a/c (eg. Wages) , Cr Cash a/c in normal case.

DR Cash A/c CR

Date Details Fol Amount Date Details Fol Amount

Wages A/c XXX


Accrued Wages A/c
DR CR
Date Details Fol Amount Date Details Fol Amount

Wages A/c XXX


Wages A/c
DR CR

Date Details Fol Amount Date Details Fol Amount

Cash A/c XXX


In the Income statement or Profit and Loss a/c: say wages_ Under Operating expense add accrued wages that will have reducing effect on the Net Profit

Income statement

Gross profit xx
Less operating Expenses

Less Operating Expense (e.g. wages) XX

Add: Accrued expense (e.g. wages) (xx) xx

In the Balance sheet, it is a current liability with trade payables.


Current Liabilities
Wages accrues/arrears XXX
Prepaid Expenses
Normal as above: Then Prepaid expense (eg. Rent expense) paid for next period Dr.
Prepaid Rent Expense Cr Rent expense a/c. Deduct from rent expenses in the Income
statement.
In the Statement of financial position /Balance sheet, this being a current asset appears
with such items like debtors, inventory at close.

Prepaid Incomes:
 Normal scenario – Dr Cash a/c Cr unearned Income a/c (eg. Fees for
Hire of our venue)
 When time comes it is earned, Dr unearned incomes a/c Cr Receivable
income earned a/c (eg fees for Hire of venue)
 Prepaid income are deducted from incomes in the P/L a/c and entered
as current liabilities together with creditors in the balance sheet.
Accrued Incomes

 are earned in the current accounting period and yet to be received in the coming period; have an opposing
treatment contrary to accrued expense thus:
 Dr Cash a/c , Cr Receivable income a/c (eg. Rent Received) in normal case.
 But in accruals case, Dr Unearned Income A/c (Rent received in advance), Cr Earned Income a/c (e.g. rent
received)
 In the Income statement or Profit and Loss a/c:
 Other incomes XXX
 Less accrued Income XXX
 that will have reducing effect on the Net Profit.
 In the balance sheet, this will be treated being
 current Liability
 trade payables
 Accrued incomes(prepaid)
 Prepayments refer to money paid before receiving or enjoying the product or service (prepaid expense) AND
money received before providing the product or service (prepaid income
Prepaid Expenses
Normal as above: Then Prepaid expense (eg. Rent expense) paid for next period Dr.
Prepaid Rent Expense Cr Rent expense a/c. Deduct from rent expenses in the Income
statement.
In the Statement of financial position /Balance sheet, this being a current asset appears
with such items like debtors, inventory at close.

Prepaid Incomes:
 Normal scenario – Dr Cash a/c Cr unearned Income a/c (eg. Fees for
Hire of our venue)
 When time comes it is earned, Dr unearned incomes a/c Cr Receivable
income earned a/c (eg fees for Hire of venue)
 Prepaid income are deducted from incomes in the P/L a/c and entered
as current liabilities together with creditors in the balance sheet.
QUESTION 8
Provision for Bad Debts:
Definition:

Provision for bad debts, also known as an allowance for


doubtful accounts, is an accounting estimate made by a
company to account for the possibility that some of its
accounts receivable may not be collected. It represents the
amount of expected bad debts based on historical data or
other relevant factors.
Treatment in the Books of Accounts:
To create a provision for bad debts, a company records an adjusting journal entry. This entry increases the
bad debt expense on the income statement and creates a corresponding contra-asset account called
"Allowance for Doubtful Accounts" on the balance sheet.
The provision is typically calculated as a percentage of the total accounts receivable, based on past
experience or industry norms.
This provision reduces the net accounts receivable on the balance sheet, reflecting a more conservative
estimate of the amount expected to be collected from customers.
 When specific customer accounts are identified as uncollectible, they are written off as bad debts, and the
allowance account is used to absorb
TREATMENT OF INCREASE AND DECREASE OF BAD DEBTS
1.Debit the bad debt expense account to reduce the net income
.Credit the pronvision for bad debts
2 To decrease provision of bad debts
.Debit the provision for bad debts accounts
.Credit the bad debt recovery account
Factors a company may consider to set an estimate of provision for bad debts

_The previous records of amount outstanding from each customer and trade receivables
_Natural disasters like drought earth quatkes lightening, volcanic activity that can affect business
sales
_Implementation new taxes in the country by ministry of finance forexample the tax that was
introduced in 2022 where businesses had to share profits equally with the government which
affected many businesses like supermarkets
_internal issues in the businesses forexample froud among employees which affect the business sales
In balance sheet
* Accrued income is recorded as current asset
*Where as in income statement, Accrued income is recognized as revenue
BAD DEBTS

Definition: Bad debts, also known as


uncollectible accounts or doubtful accounts,
are amounts owed by customers or clients
that a company has determined are unlikely
to be collected.
Treatment in the Books of Accounts:
When it becomes clear that a specific customer's account is uncollectible, the company writes off that account
as a bad debt. This involves removing the amount owed by the customer from accounts receivable and
recognizing it as an expense on the income statement.
The entry to write off a bad debt decreases both accounts receivable and net income.

Writing off bad debts is essential for maintaining accurate financial statements and preventing overstatement of
assets and income.
Recovery of Bad Debts

Recovery of bad debts occurs when a company is


able to collect payment on an account that was
previously written off as a bad debt.
Treatment in the Books of Accounts

When a previously written-off bad debt is collected, the company records the recovery as a separate accounting
entry.
The recovery of a bad debt increases the cash or accounts receivable on the balance sheet and decreases the
allowance for doubtful accounts (or bad debt expense) on the income statement.
This reflects the fact that the company has collected an amount it previously believed would not be collected.

The net impact of the recovery entry is an increase in the company's total assets and income.

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