Topic 4 of 6 · Form 4
Accounting procedures: adjustments
Capital expenditure buys or improves non-current assets; revenue expenditure covers running costs.
Notes for this topic 1 file, in order
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Capital and revenue expenditure and receipts
Capital expenditure buys or improves non-current assets; revenue expenditure covers running costs.
Accruals and prepayments
Expenses and incomes are matched to the period: accrued expenses (owing) are current liabilities; prepaid expenses are current assets; similarly for income received in advance or due.
Worked example: Insurance paid in the year US$1 300 includes US$100 for next year; US$50 of rent income is still owing to the business. Find the insurance expense.
Insurance expense = 1 300 − 100 = US$1 200 (prepayment of US$100 is a current asset)
Depreciation
Straight-line ((cost − residual value) ÷ useful life) and reducing balance (percentage of net book value); revaluation method; disposal of non-current assets (disposal account, profit or loss on disposal).
Worked example: A machine cost US$8 000 with a residual value of US$800 and a life of 6 years. Find annual depreciation by straight line.
(8 000 − 800) ÷ 6 = US$1 200
Irrecoverable debts
Written off as an expense; provision (allowance) for doubtful debts – increases are expenses, decreases are income; debts recovered.
Inventory valuation
Lower of cost and net realisable value; FIFO and AVCO methods.
Check yourself
- Where is an accrued expense shown in the statement of financial position?
- A van cost US$10 000 and is depreciated at 20% reducing balance. Find year 2 depreciation.
- What is net realisable value?
Show answers
- Under current liabilities.
- Year 1: 2 000; NBV 8 000; year 2: 1 600
- The estimated selling price less any costs needed to sell the item.
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