Theme 5 Measuring Periodic Income Acctg Notes

Theme 5 Measuring Periodic Income

Part A Balance Day Adjustments

Learning Objectives
a) state the meaning, types and purposes of balance day or date
b) explain the meaning and purpose of balance day adjustments
c) describe the relationships between going concern, accounting period and matching concept
d) adjust and record prepaid expenses, expenses due, income accrued and income received in advance on balance day
e) adjust and record bad debts, bad debts recovered, doubtful debts and provision for doubtful debts
f) record the general journal entries to incorporate balance day adjustments

Balance Day Adjustments

Definition of Balance Day Adjustment are entries made at the balance day in order to match the revenues and expenses accurately so that profit can be determined and to bring into account assets and liabilities not previously recorded

Purpose of Balance Day Adjustments is to match costs against related income and also to up – date the accounts at the end of the financial period

Adjustments in respect of the following are required
i) Prepaid Expenses ii) Accrued Expenses iii) Income Accrued iv) Income received in advance
v) Bad Debts vi) Doubtful Debts vii) Depreciation

a) Cash Basis Accounting
- means that revenues and expenses are not recognized until the cash is received or paid
- it ignores credit transactions

b) Accrual Basis Accounting
- means that revenue is recognized when earned and expenses when incurred, irrespective of whether they are cash or credit transaction
- it takes into account all the revenues and expenses during the period to measure profit and loss
- accrual basis is better than cash basis because revenue is matched against expenses incurred in earning them
- under this method adjusting entries are used to bring accounts up- date for preparing financial statements

i) Prepaid Expenses
- are expenses which have been paid and recorded in the current accounting