Why might balance day adjustments occur?
Prepayments
Accrual accounting
Provisions
Prepayments
The business has either paid an expense in advance (prepaid expense) or received income early (unearned income or income in advance).
Accrual accounting
The business owes money and had not paid it (accrued expense) or is owed money by another business (accrued income).
Provisions
Adjustments for depreciation and bad debts.
Balance day adjustments
Balance day adjustments for accruals and prepayments are made on balance day, aiming to match expenses and income accurately with the time period in which they had an economic effect on the company.
Prepaid expense
Debit entry: Expense account; expense increasing.
Credit entry: Prepaid account; asset decreasing.
Accrued expense
Debit entry: Expense account; expense increasing.
Credit entry: Accrued account; liability increasing.
Unearned income
Debit entry: Unearned account; liability decreasing.
Credit entry: Income account; income increasing.
Accrued income
Debit entry: Accrued account; asset increasing.
Credit entry: Income account; income increasing.
Inventory adjustment
Debit entry: Inventory adjustment account; expense increasing.
Credit entry: Inventory asset account; income decreasing.
Steps involved in recording the sale of a non-current asset
1. Transfer the cost of the asset account into the sale account.
2. Transfer the accumulated depreciation of the asset from the Accumulated Depreciation account into the Sale of Asset account.
3. Recognize the proceeds. Enter the cash received into the Cash at Bank account, and the Sale of Asset account. Alternatively, if the asset was sold on credit, enter the amount owing into the Debtor account, and Sale of Asset account.
4. Calculate the balance of the Sale of Asset account. A balance on the debit side is a profit on disposal, and a balance on the credit side is a loss on disposal. This result can be checked by subtracting the carrying amount from proceeds.
5. Transfer the balance of the Sale of Asset account into the Loss on Disposal or the Profit on Disposal account.
Steps involved in recording bad debts and doubtful debts
1. Write off bad debts as they occur by debiting the Bad Debts, debiting GST Collected if applicable, and crediting Accounts Receivable.
2. On balance day, transfer the balance of Bad Debts into the Allowance for Doubtful Debts.
3. Also on balance day, enter the estimation of likely bad and doubtful debts. Credit the Allowance for Doubtful Debts, and debit the Bad Debts, with the appropriate amount.
