Monday, 24 January 2022

Accruals

 



An accrual is an amount outstanding for payment by the end of an accounting period, so has not been entered into the ledger accounts.

 

In accounting for accruals, the effect that needs to occur will be to increase the relevant expenditure in an attempt to account for the outstanding transactions which may not have been paid for and then to increase the liability in that accounting period, recognising that the business owes that amount.


Example:

You are working on the accounting records of a business for the year ended 31 January 20X7. You are looking at the business rates expense for the year and this shows payments for the following periods:

 

February 20X6 – September 20X6- Office 1

£980

February 20X6 – December 20X6- Office 2

   £1,054

 

Calculate the value of the adjustment required for the business rates account as at 31 January 20X7 and show the journal entry needed for the relevant adjustment.

Solution:

 

 

Accruals

February 20X6 – September 20X6- Office 1

£980

£980/8x4= £490

February 20X6 – December 20X6- Office 2

   £1,054

£1054/11x1=95

Total accruals adjustment needed

 

£490+£95=£585

                      

Account name

Amount (£)

Dr/ Cr

Business rates

585

Dr

Accruals

585

Cr

Friday, 21 January 2022

Accruals and prepayments

Below is a handy chart on accounting adjustments: prepaid expenses, prepaid income, accrued expenses and accrued income. Knowing what to debit and what to credit for each will come in handy in your exams.






Monday, 13 December 2021

Christmas is around the corner

 

WHAT IS THE EMPLOYMENT STATUS OF SANTA’S HELPERS?

Elf-employed!

 

WHY DID SANTA HAVE TO FIT BOOSTER SEATS AND SEAT BELTS ON HIS SLEIGH?

Its because of elf and safety!

 

Its is our sincere hope that you get a pleasant visit from Santa J.

We hope and trust you have a nice and pleasurable season and get well prepared for more productive work next year.

 

God’s blessings be with us all.

Monday, 6 December 2021

What is tax evasion?

 

What is tax evasion?

What is tax avoidance?

Who is asking? Why?

Never mind the answer, it’s all legit!

Monday, 29 November 2021

Classification of costs by behaviour

 

CLASSIFICATION OF COSTS BY BEHAVIOUR 

 

Classifying costs by behaviour requires you to classify the costs into-

 

-Variable costs

-Fixed costs

-Semi-variable costs

-Stepped costs

 

 

Variable costs- these are costs that vary with the level of production or activity. It is usually assumed to vary in direct proportion to production. For example, if you make twice the number of chairs then the assumption is that the amount of wood used would be doubled.

 

Fixed costs- these are costs that are not affected by changes in the level of production or activity, hence costs that don’t vary. For example, rent costs for a factory. It is assumed that if production increases, the factory rent cost would not be increasing based on the production volume.

 

Semi-variable costs- these are costs that have a fixed element and a variable element. This means that if production were to double, the cost of production will not double because of the fixed cost element in the production cost, which will remain the same. For example, the cost of electricity for the factory has a fixed element relating to lighting and a variable element relating to power used in the production line.

 

Stepped costs- these are costs that remain fixed up to a particular level of activity, but which rise to a higher (fixed) level, if activity goes beyond that range. For example, a firm may pay £40,000 per year to rent a factory in which they can produce up to 1 million units of product per year. However, if demand increases to more than 1 million units, a second factory may be required, in which case the cost if factory rent may step up to, say, £80,000 per year and then be constant until we want to make more than 2 million units.

Monday, 22 November 2021

What do you believe about the career path you have chosen?

 What do you believe about the career path you have chosen?


For most people this is a strange question - we rarely spend time thinking about our own beliefs. A quick answer to this is- many people think that the accounting profession is a well-paid profession, especially, when you are a qualified Accountant.

 

The collection of beliefs you hold about your career - is reflective in most of the choices you make.

- How much risk you are prepared to take.
- What's risky and what’s not.
- What projects and initiatives to undertake.
- What kind of resources you need to succeed in your career.
- Who to partner with, if any.
- Cooperate or compete.
- What your employers should expect from you.
- How hard you expect to work.

  And lots more….

 

If your belief is that the accounting profession pays well, what happens when that belief isn’t being met? You change career?

All these decisions stem from your beliefs, and it will help you to make them explicit. Once you surface those beliefs, you can start to distinguish which are useful beliefs and which are not.

- What is the benefit of a particular belief?
- Is this belief relevant to your current world
- Or is it a carry-over from some past part of life?

Believe in yourself and the career you have chosen.

Tuesday, 16 November 2021

High/Low Point Method

 

HIGH/ LOW POINT METHOD

 

Splitting of semi-variable costs

 

Included in semi-variable costs is an element of both fixed and variable costs. In cost accounting it is important to be able to split these costs and identify the variable costs separately from the fixed costs and this is achieved by using the ‘high/low’ method.

 

The idea behind the application of the high/low method is that if we agree that fixed cost doesn’t change based on the activity level, that is, as you produce more units, the fixed cost will remain the same. So, where the cost changes, as activity is changing; this will be as a result of the variable costs element.

 

The high/low method of splitting semi-variable cost picks the total cost at two different activity levels and finds the additional cost incurred in making the additional units. The additional cost is then divided by the number of additional units made and this leads to the variable cost per unit, which is then used to calculate the total variable and fixed cost by applying the unit cost to the high or the low activity level.

 

Question:


Solution:

Additional cost= £24715-16480= £8235

Additional units= 3150-1800= 1350

VC/ unit= £8235/1350= £6.10

Total VC, using the low point= £6.10x1800= £10980

Total FC, using the low point = £16480-10980= £5500

 

 

This will be applied to all the activity levels in the question:

2100 units x £6.10= £12,810

2600 units x £6.10= £15,860

2900 units x £6.10= £17,690