1 By Otto Khatamov Financial Accounting 2010/11 week 4

2 Financial Accounting 1. Accruals and prepayments Expense: Prepayments Accrued expenses Income: Accrued Income Deferred Income

3 Financial Accounting 2. Depreciation and disposal of non-current assets IAS 16: Property, Plant and Equipment Depreciation: Straight line Reducing balance Disposal Revaluation

4 Accrual Basis Expense: -Prepayments - Accrued expenses Income: -Accrued Income; -Deferred income ACCRUAL BASIS

5 Accrual Basis EXPENSE 1. Expense paid in advance = PREPAID EXPENSE = PREPAYMENTS 2. Expense incurred but not invoiced/paid = ACCRUED EXPENSE INCOME 3. Income earned but not invoiced/paid = ACCRUED INCOME 4. Income received in advance = DEFERRED INCOME

Matching concept 6 The concept that expenses incurred in generating revenue should be matched against the revenue in determining profit or loss for the period

7 Prepayments There are two bookkeeping approaches. 1. Traditional method involves: a) calculating either expense or prepayment b) bringing down the prepayment, as an asset, on the expense a/c.

8 Prepayments The amount paid In respect of the amount prepaid D/EDr Expense a/c Cr Cash a/c D/EDr Prepayments a/c Cr Expenses a/c 2. Alternative approach

9 Accrued expenses The amount paid In respect of the charge (calculated) for the accounting year D/EDr Expense a/c Cr Cash a/c D/EDr I&E a/c Cr Expenses a/c Traditional approach

10 Accrued expenses The amount paid D/EDr Expense a/c (I&E a/c) Cr Accrued expense a/c (Liability) Alternative approach

11 Property, Plant and Equipment IAS 16 Prescribes the accounting treatment for PPE. The principle issues addressed by this standards are: Asset recognition The determination of carrying amount Depreciation charges to be recognised

12 Depreciation and Disposal of Non-current assets Depreciation: -Concept; - Definitions; - Methods; -Comparison Disposals: -Ledger accounting; -Part exchange. Revaluations: -Appreciating -assets Property, Plant and Equipment (IAS 16)

13 Depreciation Methods There are many methods of calculating depreciation, generally based on either the passage of time or the level of activity (or use) of the asset: Straight-line; Reducing balance; Activity-based; Sum of years digits Units of production Units of time

Depreciation 14 Is an expense (charge) for the year – a debit entry. D/E Dr Depreciation expense a/c Cr Accumulated depreciation a/c The accumulated depreciation a/c provides the balance which is set off against the assets cost in arriving at carrying amount in the statement of financial position

15 Comparison of methods: 1. Straight line AdvantagesDisadvantages - Simplest method - unrealistic - Constant annual charge does not distort comparison - Depreciation charge must cease when end of useful life is reached - Easy to calculate accumulated depreciation 2. Reducing Balance - Accelerated depreciation expense reflects greater usage of assets in earlier years - Calculations are more complex - Assets in use are never fully depreciated - No need to separately identify assets

16 Disposals Transfer cost and accumulated depreciation to a disposals account Account for the proceeds D/E Dr Disposals a/c (cost) Cr Asset a/c (cost) D/E Dr Cash (or receivable) Cr Disposals a/c Dr Accumulated depn. Cr Disposals a/c

17 Disposals At the end of accounting period, transfer the profit or loss on disposal (i.e. the balance on the disposals a/c) to the I&E a/c Profit on Sale Loss on Sale D/E Dr Disposals a/c Cr I&E a/c D/E Dr I&E a/c Cr Disposals a/c

18 FA; aims of lecture 4 Accruals and Prepayments Depreciation and disposals of non-current assets Any questions?