Unit 4 - Accounting Procedures
4.1 Capital and Revenue Expenditure and Receipt
Capital expenditure - money spent on buying, improving, or extending the life of non current assets.
Revenue expenditure - money spent on the day-to-day running costs of a business.
Capital receipt - money received from selling non current assets.
Revenue receipt - money received from the regular operations of a business, such as sales.
4.2 Provision for Depreciation and Disposal of Non-Current Assets
Depreciation - the amount of value an asset loses each year, due to the ‘wear and tear’ (obsolete, outdated, no longer efficient).
Reasons we account for depreciation:
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Helps to figure out how much value your assets lost during the year.
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Prudence principle.
Methods of depreciation:
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Straight-line = (Cost – Residual Value) / Estimated years
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Reducing balance = (Cost – All Previous Depreciation) x %
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Revaluation = Opening Value + Purchases For The Year – Closing Value
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Ledger accounts & Journal entries for Provision of Depreciation:
Ledger accounts & Journal entries of Sales of Non Current Assets:
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4.3 Other Payables and Receivables
In accounting, you must match costs and revenues. This follows the matching principle.
Accrued expenses: expenses that have been incurred but not paid yet.
Prepaid expenses: expenses that have not been incurred yet but paid in advance.
Accrued income: income that has been earned but not received yet.
Prepaid income: income that has not been earned yet.
In a statement of financial position, accrued expenses and prepaid income are current liabilities. Prepaid expenses and accrued income are current assets.
In an income statement, anything accrued must be added and anything prepaid must be deducted.
4.4 Irrecoverable Debts and Provision for Doubtful Debts
Irrecoverable debts – Money that a business is unable to receive from a credit customer and must be written off as a loss.
Recovery of debts – Payment received for a debt that had previously been written off as irrecoverable.
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Ledger accounts & Journal entries of Irrecoverable Debts:
Ledger accounts & Journal entries of Recovery of Debts:
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Provision for doubtful debts:
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Ensures profit is not overstated in the year.
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Prudence principle
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Ledger accounts & Journal entries of Provision of Doubtful Debts:
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4.5 Valuation of Inventory
Inventory must be calculated with the valuation of inventory at the lower of cost or net realisable value.
This follows the prudence principle.