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Contents of Published Accounts
Transcript of Contents of Published Accounts
and how to construct one and what elements
to include Above is a typical balance sheet
and what should go in it Accounting concepts to follow when amending
-Double entry principle
-Money-measurement principle Rules when amending income statements:
-MUST Use the same format
-If there are changes in the amount of units produced & sold, then this will lead to changes in sales revenue & variable costs Rules when amending balance sheets:
-Quite common for the business to start with last year's balance sheet and make the amendments Amendments: Rules when amending published accounts: Possible amendments to the published accounts: 1) Goodwill-"arises when a business is valued or sold for more than the balance-sheet value of its assets”
-Only appears on the balance sheet before, during & after a transaction
-Written off as soon as possible
-Shouldn't appear as an asset
-Its a non-current intangible asset 2) Valuing Intangible Assets:
Examples of intangible assets are below. They aren't physical but add value Intangible asset rules:
-Hard to add value to
-Normally people dont record them in balance sheets unless they are acquired through a merger/takeover
-Market value of companies with alot of intangible assets will be higher than the balance sheet 3) Capital & Revenue Expenditure:
Capital expenditure: "any item bought by a business and retained for more than one year, normally these assets are fixed/non-current” e.g. Revenue expenditure: “any expenditure on costs other than non-current asset expenditure”
This is on any expenses which are short term and are mostly done in the profit & loss account Amended income statement & balance sheets: Amended income statement: Amended balance sheet: Relationship between income statement & balance sheet: -A sale will increase an asset/decrease a liability. A expense will increase a liability/decrease an asset
-1 side of all the sales and expenses entries are in the income statement & the other side is in the balance sheet.
-No one can record a sale/expense without affecting the balance sheet -Making sales requires the business to keep a cash balance. Making sales on credit gives accounts receivable
-The business needs to keep a inventory if they want to sell products
-Getting products involves credit purchases which generates accounts payable
-Depreciation is recorded for using fixed assets & is recorded in the accumulated contra account Definition: The decline in the estimated of a non-current asset over time -Almost all fixed assets depreciate or fall in value over time.
-It is important to take into consideration depreciation in the published accounts as assets will keep some value and will appear on the balance sheet every year until they are sold or fully depreciated Why assets decline in value:
-Wear & tear
-Time Disadvantages of recording a capital expenditure as a expense: -The value of the business would go down as assets would have been recorded as an annual expense
-Profits for the year would also go down by a large amount as fixed asset expenditure can be very expensive Straight line depreciation: A constant amount of depreciation is subtracted from the value of the asset every year Evaluation: Strengths
-Easy to calculate and understand unlike other methods Evaluation: Weaknesses
-Mistakes in the estimates of life expectancy & residual value can lead to inaccurate depreciation calculations
-Some assets depreciate quicker than others and the straight line method doesn't show this
-Doesn't take into account technology is advancing quickly
-Repairs and maintenance costs usually increase as the asset increases in age. Straight line method doesn't adjust for this. -Operating expenses is a broad category encompassing selling, administrative & general expenses:
-Some of these operating costs are prepaid before the expense is recorded, and until the expense is recorded, the cost stays in the prepaid expenses asset account.
Some of these operating costs involve purchases on credit that generate accounts payable.
Some of these operating costs are from recording unpaid expenses in the accrued expenses payable liability. Worked example: A lawyer's firm buys a computer for $3,000. The firm decides to sell the computer after 4 years. After 4 years, the firm expects the computer to have a residual value of $200. Annual depreciation: ($3,000-$200)/4 =$700.
Each year of the computer's useful life it will depreciate by $700. This will be included in the firm's overheads on the profit & loss section of the income statement. On the balance sheet $700 will be deducted annually from the asset value of $3000. After 4 years, it will be valued at $200 on the balance sheet Thanks for listening :) Amended income statement after 1 year to take into consideration depreciation