Unit 4 Accounting – Core Balance Day Concepts & Depreciation

Balance Day Adjustments: Purpose & Principles

  • Adjust revenues & expenses to reflect amounts EARNED/INCURRED within the reporting period (accrual basis), even if cash flows differ.

  • Essential for Relevance & Faithful Representation; aligns with Accrual Basis, Period, and Going Concern Assumptions.

Balance Day Adjustments vs Closing Entries

  • BDAs: Adjust ledger accounts (assets, liabilities, revenues, expenses) before profit is measured.

  • Closing Entries: Transfer adjusted revenues & expenses to Profit\ \&\ Loss\ Summary after BDAs are posted, resetting temporary accounts for the next period.

Trial Balances

  • Pre-adjustment Trial Balance: Balances before BDAs.

  • Post-adjustment Trial Balance: Balances after BDAs, ready for financial statements.

Prepaid Expenses (Asset)

  • Cash paid in advance, still holding economic benefit (Current\ Asset).

  • BDA: Debit Expense (consumed portion), Credit Prepaid Expense.

  • Example: Annual insurance $3000$ means $250$ consumed per month.

Accrued Expenses (Liability)

  • Expense incurred but unpaid at balance day (Current\ Liability).

  • BDA: Debit Expense, Credit Accrued Expense.

  • Subsequent payment: Debit Accrued Expense (and GST if applicable), Credit Cash/Bank.

Depreciation (Non-cash Expense)

  • Systematic allocation of non-current asset cost over its useful life.

Straight-Line Method

  • Equal allocation each period.

  • Formula: Depreciation_{pa}=\frac{Cost-Residual\ Value}{Estimated\ Life}

  • Journal: Debit Depreciation Expense, Credit Accumulated Depreciation.

Reducing Balance Method

  • Higher expense in early years.

  • Formula: Depreciation=Carrying\ Value_{start}\times\ Depreciation\ Rate

  • Journal: Same as straight-line.

Determining Cost of a Non-current Asset

  • Included: Purchase price, one-off costs (delivery, installation, modifications).

  • Excluded: Ongoing costs (insurance, registration, maintenance), GST.

Disposal of Non-current Assets

  1. Remove carrying value: Debit Accumulated Depreciation, Debit Disposal, Credit Asset.

  2. Record proceeds: Debit Cash/Bank (or Trade-in), Credit Disposal.

  3. Balance Disposal account to determine profit (Credit balance) or loss (Debit balance) to Income Statement.

Unearned Revenue (Liability Approach)

  • Cash received before earning (Current\ Liability).

  • BDA: Debit Unearned Revenue, Credit Revenue (when earned).

Accrued Revenue (Asset)

  • Revenue earned but not received at balance day (Current\ Asset).

  • BDA: Debit Accrued Revenue, Credit Revenue.

  • Subsequent receipt: Debit Bank, Credit Accrued Revenue (and Revenue for new period if applicable).

Key Ethical & Reporting Notes

  • Omitting BDAs (e.g., depreciation) overstates profit & assets, breaching Relevance & Faithful Representation, which is unethical.

  • Depreciation affects Income Statement (reduces profit) and Balance Sheet (reduces carrying value of asset); it is a non-cash expense and thus not in the Cash Flow Statement.

  • Depreciation method selection should reflect the asset

’s revenue-earning pattern for accurate profit measurement.

Balance Day Adjustments: Purpose & Principles

Adjust revenues & expenses to reflect amounts EARNED/INCURRED within the reporting period (accrual basis), even if cash flows differ.

Essential for Relevance & Faithful Representation; aligns with Accrual Basis, Period, and Going Concern Assumptions.

Balance Day Adjustments vs Closing Entries

BDAs: Adjust ledger accounts (assets, liabilities, revenues, expenses) before profit is measured.

Closing Entries: Transfer adjusted revenues & expenses to Profit\ &\ Loss\ Summary after BDAs are posted, resetting temporary accounts for the next period.

Trial Balances

Pre-adjustment Trial Balance: Balances before BDAs.

Post-adjustment Trial Balance: Balances after BDAs, ready for financial statements.

Prepaid Expenses (Asset)

Cash paid in advance, still holding economic benefit (Current\ Asset).

BDA: Debit Expense (consumed portion), Credit Prepaid Expense.

Example: Annual insurance $3000$ means $250$ consumed per month.

Accrued Expenses (Liability)

Expense incurred but unpaid at balance day (Current\ Liability).

BDA: Debit Expense, Credit Accrued Expense.

Subsequent payment: Debit Accrued Expense (and GST if applicable), Credit Cash/Bank.

Depreciation (Non-cash Expense)

Systematic allocation of non-current asset cost over its useful life.

Straight-Line Method

Equal allocation each period.

Formula: Depreciation_{pa}=\frac{Cost-Residual\ Value}{Estimated\ Life}

Journal: Debit Depreciation Expense, Credit Accumulated Depreciation.

Reducing Balance Method

Higher expense in early years.

Formula: Depreciation=Carrying\ Value_{start}\times\ Depreciation\ Rate

Journal: Same as straight-line.

Determining Cost of a Non-current Asset

Included: Purchase price, one-off costs (delivery, installation, modifications).

Excluded: Ongoing costs (insurance, registration, maintenance), GST.

Disposal of Non-current Assets

Remove carrying value: Debit Accumulated Depreciation, Debit Disposal, Credit Asset.

Record proceeds: Debit Cash/Bank (or Trade-in), Credit Disposal.

Balance Disposal account to determine profit (Credit balance) or loss (Debit balance) to Income Statement.

Unearned Revenue (Liability Approach)

Cash received before earning (Current\ Liability).

BDA: Debit Unearned Revenue, Credit Revenue (when earned).

Accrued Revenue (Asset)

Revenue earned but not received at balance day (Current\ Asset).

BDA: Debit Accrued Revenue, Credit Revenue.

Subsequent receipt: Debit Bank, Credit Accrued Revenue (and Revenue for new period if applicable).

Key Ethical & Reporting Notes

Omitting BDAs (e.g., depreciation) overstates profit & assets, breaching Relevance & Faithful Representation, which is unethical.

Depreciation affects Income Statement (reduces profit) and Balance Sheet (reduces carrying value of asset); it is a non-cash expense and thus not in the Cash Flow Statement.

Depreciation method selection should reflect the