AS 2 — Further Aspects of Final Accounts

Accruals and Prepayments of Income

Accrual of Income — An amount due in an accounting period which has not been received at the end of that period.

• Added to the income in the trial balance before listing it in the income statement
• Shown as a current asset in the year end balance sheet

Prepayment of Income — A payment received in advance of the accounting period to which it relates.

• Deducted from the income in the trial balance before listing it in the income statement
• Shown as a current liability in the year end balance sheet

Bad Debts Recovered

When a former trade receivable, whose account has been written off as a bad debt, makes a payment.

To write off a bad debt
Debit bad debts written off account
Credit trade receivables account

At the end of the year total the bad debts written off and add them to the income statement as an expense to reduce profit for the year.

How to treat a bad debt who makes a payment
Debit cash/bank account
Credit bad debts recovered account

Provision for doubtful debts

An estimate by a business of the likely percentage of its trade receivables which may go bad during any one accounting period.

Can be worked out by totalling all of the accounts not expected to pay or by using a percentage of the total trade receivables.

How to treat an increase in provision for doubtful debts
Debit Income Statement
Credit Provision for doubtful debts account

By creating a provision for doubtful debts the business is following the accounting concept of prudence in the realistic estimate of its trade receivable position.

How to treat a decrease in provision for doubtful debts
Debit Provision for doubtful debts account
Credit Income Statement

A decrease in provision is added to gross profit in the income statement and is described as ‘reduction in provision for doubtful debts’.

Minimising the Risk of Bad Debts

• The seller should ask for references. One of these should be the buyer’s bank and the others should be from traders with whom the buyer has previously done business.
• The seller, should take up the references and obtain satisfactory replies.
• Once satisfactory replies have been received the customer should receive a credit limit.

Depreciation of Non-Current Assets

Depreciation is a measure of the amount of the fall in value of non-current assets over a time period.

Double entry book-keeping for each year's depreciation is:
Debit Income Statement
Credit Provision for Depreciation Account

Sale of Non-Current Assets

Original cost of the asset

Debit Disposals Account
Credit Non-Current Asset Account with cost price

Depreciation provided to date

Debit Provision for Depreciation Account
Credit Disposals Account with depreciation to date

Sale Proceeds

Debit Bank/Cash Account
Credit Disposals Account with the sale proceeds

Loss on Sale

Debit Income Account
Credit Disposals Account with amount of under-provision for depreciation.

Profit on Sale

Debit Disposals Account
Credit Income Account with amount of over-provision of depreciation.

Part-Exchange of a Non-Current Asset

Debit Non-Current Asset Account
Credit Disposals Account