Balance Day Adjustments
Balance day adjustments are alterations to the businesses records that are performed on the last day of the reporting period (i.e. balance day). These are performed to correctly adjust the revenue and expense accounts to match revenues earned against expenses incurred under accrual accounting, hence following the matching principle. In the general journal, where these transactions are recorded, the narration is usually ‘adjusting entry.’
Is the process of the allocation of the cost of a NCA to an expense account over its estimated useful working life. Depreciation is a non-cash transaction.
Cost price: Purchase price (historical cost) plus any “one-off” cost required to get the asset in a revenue earning position.
Scrap/Residual Value: The expected resale value of the asset, which is considered to happen at the end of the assets useful life.
Straight Line Depreciation: Method of depreciation that assumes asset will generate an equal amount of revenue over its useful life.
Formula (Straight line): (cost – scrap) / life dollars of depreciation per annum.
Entry: - [DR: Depreciation of (asset), CR: Accumulated depreciation of (asset).]
}’Adjusting entry for depreciation of (asset) using the straight line method at #% of cost.’
Balance Sheet (extract):
|less acc. depreciation||2 000|
^ Referred to as book/carrying value, which is the value of the asset yet to be depreciated. Note that this is not necessarily the market value.
*Note*: [This is a tricky exam question that pops up now and then.]
Depreciation does leads to an indirect retention of funds within the business. As it is a non-cash transaction, it does not affect the businesses cash position negatively. However, as it is treated as an expense, it leads to a lower profit, and hence there will be less tax and more likely chance of fewer drawings by the owner.
Disposal of NCA: (steps)
- Transfer the historical cost of the asset to the newly created ‘Carrying value of (asset)’ a/c.
- [DR: Carrying Value of (asset), CR: (asset).]
}’Transfer of cost of asset sold.’
- Transfer the accumulated depreciation of the asset to the ‘Carrying value of (asset)’ a/c.
- [DR: Accumulated depreciation of (asset), CR: Carrying value of (asset).]
}’Transfer of accumulated depreciation of asset sold.’
- Record proceeds gained in ‘Sale/Proceeds of asset’ a/c. (i.e. the cash or trade in credit received from the sale of the asset.)
-[DR: Bank/Creditor (for trade in), CR: Sales/Proceeds of (asset).]
- Close the carrying value and Sale/Proceeds of asset a/c to the P/L summary a/c.
-[DR: P/L Summary, CR:Carrying Value of (asset).]
and [DR: Sales/Proceeds of (asset). CR: P/L Summary.]
}both: ‘Closing Entry.’
Prepaid Expense: (asset approach)
-A prepaid expense is an expense item paid for in advance but not yet used. Hence it has a future economic benefit, and therefore is treated as an asset.
-Under the asset approach, the original payment is treated as an asset (in the cash payments journal).
-Then, on balance day, the amount of the prepaid expense used is transferred to an expense a/c. [This is the balance day adjustment.]
Entry: - [DR: (expense), CR: Prepaid (expense).]
}’Adjusting entry for (expense) used/expired this period.’
Accrued Expense: (liability approach)
-An accrued expense is an expense item that has been incurred during the period but not yet paid.
-Under the liability approach, the amount that has not been paid on balance day is treated as a liability.
-Then, in the next period, the amount that is paid is simply deducted from the liability account from the entry in the cash payments journal.
Entry: – [DR: (expense), CR: Accrued (expense).]
}’Adjusting entry for (expense) owing/not paid in this period.’
-After a physical stocktake on balance day, the entry for stock loss/gain is recorded in the general journal as a balance day adjustment.
Entry: – [DR: Stock loss, CR: Stock Control.] or [DR: Stock Control, CR: Stock gain.]
}’Adjusting entry for stock loss/gain as revealed by the physical stocktake.’
Stock of materials/supplies:
-These items are used to in the day-to-day operations of the business. These materials, however, are prone to getting lost or being used up.
-Hence, the original payment is treated as an asset, and then on balance day, the used/lost amount is transferred to an expense account.
Entry: -[DR: (item expense), CR: Stock of (item).] }’Adjusting entry for (item) used.’
Six Column Worksheet:
-Is a single record in which the trial balance, balance day adjustments and adjusted trial balance are shown.
-This provides additional information for management with a clear outline of all the balance day adjustments, and their effects.
-It also easier to do than adjusting all the ledger accounts, and also assists in the preparation of reports.
 By being a guess, depreciation goes against reliability, but adheres to relevance.
 The other method of depreciation in this accounting study course is discussed later in Issues of Accounting.
 Normally converted to a percentage per annum rate of the total value of the asset.
Ashish Sharma completed his VCE in 2005 and achieved a perfect score of 50 in Accounting. These are his notes, which he has generously donated to the VCE help community.