Step 11 - Net profit calculated in SOPL is transferred to the capital/equity section in SOFP.

Step 11 - Net profit calculated in SOPL is transferred to the capital/equity section in SOFP.

STEP 1: Finish the SOPL

At the bottom of the SOPL, you will get either: Net Profit, or Net Loss

STEP 2: Identify where it goes in SOFP Net profit It goes to Equity (Capital / Retained Earnings)

STEP 3: Transfer Net Profit to SOFP (Equity section)

Net profit increases retained earnings.

STEP 4: Check the accounting equation

If SOPL → SOFP transfer is correct, the statement will balance; i.e. A = E + L

Step 10 - Dealing with adjustments - More Accruals & Prepayments

Step 10 - Dealing with adjustments - More Accruals & Prepayments

RULES for ACCRUED AND PREPAYMENT

RULES

1. Expense (dr) add(+) with Accruals (Expenses occurred but unpaid)

2. Double Entry - Add expense & Liability (unpaid)

3. Expense (dr) minus(-) with prepayment (expense not yet occurred)

4. Double Entry - Minus expense & Asset (Pay in advance)

5. Revenue (dr) minus(-) with Prepayment/unearned (revenue not yet occurred)

6. Double Entry - Minus revenue & Liability (received in advance)

7. Revenue (dr) add(+) with Accrual (Revenue occurred but unreceived)

8. Double Entry - Add revenue & Asset (unpaid revenue)

No	Items/ (SOFP CA - Current Asset CL - Current Liability	Trial Balance (Dr)	Trial Balance (Cr)	Accruals (SOFP)	Pre Payments (SOFP)	Total (SOPL)
1	Water and electricity (Accured Water and electricity CL)	3,600		650		4,250
2	Salaries to workers (Accured Salaries to workers - CL)	20,900		1,900		22,800
3	Insurance expenses (Accured Insurance expenses - CL)	3,850		350		4,200

Step 9 - Dealing with adjustments - interest income

Step 9 - Dealing with adjustments - interest income

Interest income earned but NOT recorded (RM5,000)

To Record:

SOPL - Interest income = 5,000 (Other Income for that period)

SOFP - Current asset : Accrued income / Interest receivable = 5,000

Step 8 - Dealing with adjustments - interest on loan still accrued

Step 8 - Dealing with adjustments - interest on loan still accrued

Bank loan = 85,000 (From Trial Balance) Interest rate = 5% Interest expense (accrued) = 85,000 × 5% = 4,250

To Record:

SOPL -Interest expense = 4,250 (Expense for that period)

SOFP - Current liability: Accrued interest payable = 4,250

Step 7 - Dealing with adjustments - Accounts Receivables & Bad Debts

Step 7 - Dealing with adjustments - Accounts Receivables & Bad Debts

Net Accounts receivable = Total Accounts Receivale - Bad debts written off

            = 14,800 - 2,500 (to be minus with AR at SOFP)

= 12,300

Allowance for doubtful debts = % x Net Accounts receivable

                    = 2% x 12,300

                    = 246 (SOFP)

	RM
AFDD as at 1 July 2016	0
Less: Bad debt written off	-2,500	(to be minus with AR SOFP) & add Bad debts (SOPL)
Balance	-2,500
Less: New AFDD	246	SOFP
As at 30 June 2017	-2,746	Increase AFDD at SOPL

AFDD - Allowance for Doubtful Debt

To Record: SOPL - AFDD ((14800 - 2500)x 2%) + 2500 = 2,746 (Expense for that period)

SOFP

Accounts receivable = 14,800 - 2,500 = 12,300

AFDD = 246

Additional Notes : Accounts Receivables & Bad Debts

For small and medium sized firm, credit sales really help the owner to manage their cash flow more efficiently and effectively. Literally, the owner could invest the extra cash into any activities that could generate income to them. However, in the real world scenario, credit sales help them to find enough time and funds to pay the amount they owed. Most companies and small and medium sized firm, extend credit to buyers of their goods and service to facilitate sales. This extension of credit has given rise to debtors or accounts receivables. Unfortunately, credit sales increase the risk of bad debts. Bad debts arise when a trade debtor cannot or purposely did not willing to pay the amount owed in respect of goods and services sold on credit. The important fact for the students to understand is treating a debt as bad is a matter of judgment. Every situation is unique and it is up to discretion of the management. Normally, a debt may be irrecoverable because the debtor cannot be traced or the debtor has been declared bankrupt. Bad and Doubtful Debts Bad Debts Amount of debt that is proven to be uncollected in whole or in part. Commonly deducted in the same accounting period in which the credit sales were recognized – follows the matching concept. Doubtful Debts Estimate made of the amount of debtor (at the end of accounting period) that will probably not to be collected (possibility to become bad debts). Not certain who are likely to be bad or how much are likely to be bad. Reason of providing doubtful debts: Business will not overcast profit, or Business will not under cast losses Allowance Method of Accounting for Bad Debts At the end of accounting period, doubtful debts must be created first which is based on the amount of Account Receivables at that date. Then, an adjusting entry is prepared: debit to Bad Debts Account and credit to Allowance for Doubtful Debts Account (Provision for Doubtful Debts Account). Benefits of this method: Records the estimated bad debts as an expense of the period in which the revenue from credit sales was recognised (matching concept). The entry establishes an allowance account that is deducted from account receivable on the balance sheet in order to report account receivable at net realizable value. Net Accounts receivable = Total Accounts Receivale - Bad debts written off = 10300-200 (to be minus with AR SOFP) = 10100 Allowance for doubtful debts = % x Net Accounts receivable = 3% x 10100 = 303 (SOFP)

	RM
AFDD as at 1 July 2016	100
Less: Bad debt written off	-200	(to be minus with AR SOFP) Bad debts (SOPL)
Balance	-100
Less: New AFDD	303	SOFP
As at 30 June 2017	203	Increase AFDD SOPL

Step 6 - Dealing with adjustments - Depreciation

Step 6 - Dealing with adjustments - Depreciation

Straight line (On cost)

Records an equal portion of the cost of the non current asset as depreciation expense in each accounting period in which the non current asset is used.

Formula:

Depreciation expense =      (Cost - Scrap value) / Useful life                                      

                                                 

or

Depreciation expense = % fixed depreciation X (cost-scrap value)

So,

Furniture depreciation Cost = 21,000 Depn = 10% × 21,000 = 2,100

To Record:

SOPL - Depreciation : Furniture  = 2,100 (Expense for that period)

SOFP - add to new accumulated depreciation balances for Furniture 2,100

Office equipment depreciation

Office equipment at Cost = 15,000 Depn = 20% × 15,000 = 3,000

To Record:

SOPL -  Depreciation : Office equipment = 3,000 (Expense for that period)

SOFP - add to accumulated depreciation balances for Office equipment 

From Trial Balance 3,000 + 3,000 = 6,000

Motor Vehicles depreciation

Motor Vehicles at cost = 60,000 (From Trial Balance) Accumulated Depreciation (1 Jan 2023) = 12,000 (From Trial Balance)

NBV at start of year = 60,000 − 12,000 = 48,000 Depn = 20% × 48,000 = 9,600

To Record: SOPL - Depreciation : Motor Vehicles = 9,600 (Expense for that period) SOFP - add to new accumulated depreciation balances for Motor Vehicles

From Trial Balance 12,000 + 9,600 = 21,600

Additional Notes : Reducing Balance Method (net book value (NBV))

Calculate depreciation expense for each accounting period by multiplying in fixed percentage with the assets net book value (NBV). Formula: Depreciation expense = % fixed depreciation X NBV for each year *Net Book Value (NBV) = Cost – Accumulated Depreciation. Example: Assume that a business has a motor vehicle, which was purchased on1 January 20x1 for RM50000. The business’s policy is to depreciate motor vehicle at a rate of 30% annually. Calculate the depreciation expense for the motor vehicle for the first 5 years. Year Depreciation expense Accum. Depn. NBV (RM) (RM) 20x1 30% x RM50000 = RM15000 15000 35000 20x2 30% x RM35000 = RM10500 25500 24500 20x3 30% x RM24500 = RM7350 32850 17150 20x4 30% x RM17150 = RM5145 37995 12005 20x5 30% x RM12005 = RM3602 41597 8403 Depreciation Motor Vehicles = 10% x 38,000 = 3800 (Record SOPL) Depreciation Fixtures and Fittings Net Book Value (NBV) = Cost – Accumulated Depreciation. = 32700 - 11500 = 21200 Depreciation expense = % fixed depreciation X NBV for each year = 20% x 21200 = 4240 (Record SOPL) Record in SOFP Accumulated Depreciation Motor Vehicles = 11400+3800 = 15200 (SOFP) Accumulated Fixtures and Fittings = 11500+4240 = 15740 (SOFP)