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PART D: RECORDING TRANSACTIONS AND EVENTS 

 

192

 

ANSWER 

THE UMBRELLA SHOP 

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8 

 

$ 

$ 

Revenue 

 156,000 

Opening inventory 

 10,000 

 

Purchases  

65,000 

 

Carriage inwards 

  1,000 

 

 

 76,000 

 

Closing inventory (W1) 

 

13,000 

 

Cost of goods sold 

 

 

63,000 

Gross profit 

 

 93,000 

Selling expenses 

 10,000 

 

Carriage outwards 

   2,000 

 

Administration expenses (W2) 

 16,500 

 

Finance expenses 

   5,000 

 

 

 

 33,500 

Profit for the year  

 

 59,500 

THE UMBRELLA SHOP 

STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8 

 

 $      

 $      

Assets 

 

 

Non-current assets 

 

 

  Land and buildings 

 

125,000 

  Plant and machinery 

 

  75,000 

 

 200,000 

Current assets 

 

 

 Inventory 

(W1) 

13,000 

 

  Trade accounts receivable 

54,000 

 

 Prepayments 

(W4) 

1,500 

 

  Cash at bank and in hand 

 

14,000 

 

 

 

  82,500 

 

 

 

282,500 

Capital and liabilities 

 

 

Proprietor's capital 

 

 

  Balance brought forward 

180,000 

 

  Profit for the year 

  59,500 

 

 

 

239,500 

Current liabilities 

 

 

 Trade 

account 

payable 

40,000 

 

  Accruals (W3) 

  3,000 

 

 

 

  43,000 

 

 

 

282,500 

Workings 

1 Closing 

inventory 

As the figure of $13,000 is after writing off damaged goods, no further adjustments are 

necessary. Remember that you are effectively crediting closing inventory to the statement of profit 

or loss and the corresponding debit is to the statement of financial position. 

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2 Administration 

expenses 

 

 $      

Per trial balance 

15,000 

Add accrual (W3) 

  3,000 

 

18,000 

Less prepayment (W4) 

 (1,500) 

 

 

16,500 

3 Accrual 

 

 $      

Rent for year to 30 June 20X9 

 

12,000 

Accrual for period to 30 September 20X8 (

3

/

12

  $12,000) 

 

  3,000 

4 Prepayment 

 

 $       

Machinery rental for the year to 31 December 20X8 

 6,000 

Prepayment for period 1 October to 31 December 20X8 (

3

/

12

  $6,000) 

 1,500 

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PART D: RECORDING TRANSACTIONS AND EVENTS 

 

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 

Accrued expenses (accruals) are expenses which relate to an accounting period but have not yet been 

paid for. They are shown in the statement of financial position as a liability. 

 

Prepaid expenses (prepayments) are expenses which have already been paid but relate to a future 

accounting period. They are shown in the statement of financial position as an asset. 

 

 

 

 

 

 

 

1 

The bookkeeper in a business initially accrued $2,500 for advertising costs at the end of 20X1. 

However, the bookkeeper has now realised the accrual should have been $3,200, and has adjusted the 

accrual account accordingly. What impact will this adjustment have on the business’ profit for 20X1, 

and its liabilities at the year end? 

2 

Electricity paid during the year is $14,000. There was an opening accrual b/f of $500. A bill for the 

quarter ended 31 January 20X7 was $900. What is the electricity charge in the statement of profit or 

loss for the year ended 31 December 20X6? 

 A 

$14,000 

 B 

$14,100 

 C 

$13,900 

 D 

$14,400 

3 

If a business has paid rent of $1,000 for the year to 31 March 20X9, what is the prepayment in the 

accounts for the year to 31 December 20X8?  

4 

What is the correct journal for an electricity prepayment of $500? 

 

Debit Credit 

Prepayment  

 

Expense  

 

5 

An accrual is an expense charged against profit for a period, even though it has not yet been paid or 

invoiced. True or false? 

 

CHAPTER ROUNDUP 

QUICK QUIZ

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CHAPTER 10  

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1 

Profit will be reduced by $700. Liabilities will be increased by $700.   

2 B 

ELECTRICITY 

 $ 

 $ 

Cash 14,000 

Accrual 

b/f 

500 

Accrual c/f (2/3  900) 

      600 

Statement of profit or loss 

 14,100 

 

 14,600 

 

 14,600 

3 

3

/

12

  $1,000 = $250 

4 

 

 

Debit Credit 

Prepayment $500 

 

Expense  

$500 

5 True 

 

 

 

 

Now try ... 

 

Attempt the questions below from the Practice Question Bank 

 

Qs 43 – 46  

 

 

 

 

 

 

 

ANSWERS TO QUICK QUIZ 

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PART D: RECORDING TRANSACTIONS AND EVENTS 

 

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197 

C H A P T E R 

 

 

TOPIC LIST 

SYLLABUS 

REFERENCE 

1 Provisions 

D9(a)–(f)

2  Contingent liabilities and contingent assets 

D9(a)–(c)

3  Disclosure in financial statements 

F3(b)

 

 

 

 

Provisions and 

contingencies

This chapter considers provisions and contingencies which are the 

subject of an IFRS – IAS 37 Provisions, Contingent Liabilities and 

Contingent Assets. Provisions are concerned with anticipating 

losses.  

IAS 37 is an important standard and will be examined. You need to 

understand the basic definitions given in IAS 37 and be able to 

work out whether an item needs to be recognised or disclosed in 

the financial statements. 

 

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PART D: RECORDING TRANSACTIONS AND EVENTS 

 

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Study Guide 

Intellectual level 

 

 

D  Recording transactions and events 

 

 

 

9  Provisions and contingencies 

 

 

 

(a)  Understand the definition of 'provision', 'contingent liability' 

and 'contingent asset'. 

K 

 

 

(b)  Distinguish between and classify items as provisions, 

contingent liabilities or contingent assets. 

K 

 

 

(c)  Identify and illustrate the different methods of accounting for 

provisions, contingent liabilities and contingent assets. 

K 

 

 

(d)  Calculate provisions and changes in provisions. 

S 

 

 

(e)  Account for the movement in provisions. 

S 

 

 

(f)  Report provisions in the final accounts. 

S 

 

 

F 

Preparing basic financial statements 

 

 

 

3 Disclosure 

notes 

 

 

 

(b)  Draft the following disclosure notes: 

 (ii) 

Provisions 

S 

 

 

 

 

 

 

1

   Provisions 

A provision should be recognised: 

 

When an entity has incurred a present obligation 

 

When it is probable that a transfer of economic benefits will be required to settle it 

 

When a reliable estimate can be made of the amount involved 

1.1 Provisions 

 

 

 

 

 

 

IAS 37 Provisions, Contingent Liabilities and Contingent Assets views a provision as a liability. 

'A 

provision

 is a 

liability

 of uncertain timing or amount.' 

'A 

liability

 is a present obligation of the entity arising from past events, the settlement of which is 

expected to result in an outflow from the entity of resources embodying economic benefits.' 

 

 

(IAS 37, para. 10) 

 

 EXAM FOCUS POINT 

This subject area was highlighted by the ACCA examining team as being one of the least well answered 

in a previous exam. The examining team commented that students were not learning key definitions 

and displayed an inability to apply the theory to practical situations. Make sure you read this material 

thoroughly and work through the examples and questions to cement your understanding.  

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CHAPTER 11  

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IAS 37 distinguishes provisions from other liabilities, such as trade payables and accruals. This is on the 

basis that for a provision there is uncertainty about the timing or amount of the future expenditure.  

While uncertainty is clearly present in the case of certain accruals, the uncertainty is generally much less 

than for provisions. 

IAS 37 states that a provision should be recognised (which simply means 'included') as a liability in the 

financial statements when all three of the following conditions are met. 

 

An entity has a present obligation (legal or constructive) as a result of a past event. 

 It 

is 

probable (ie more than 50% likely) that a transfer of economic benefits will be required to 

settle the obligation. 

 A 

reliable estimate can be made of the obligation. 

(IAS 37, para. 14) 

What do we mean by a legal or constructive obligation? An obligation means in simple terms that the 

business owes something to someone else. A legal obligation usually arises from a contract and might, 

for example, include warranties sold with products to make good any repairs required within a certain 

time frame. A constructive obligation arises through past behaviour and actions where the entity has 

raised a valid expectation that it will carry out a particular action. For example, a constructive obligation 

would arise if a business which doesn't offer warranties on its products has a history of usually carrying 

out free small repairs on its products, so that customers have come to expect this benefit when they 

make a purchase.  

1.2 Provisions: ledger accounting entries 

When a business first sets up a provision, the full amount of the provision should be debited to the 

statement of profit or loss and credited to the statement of financial position as follows. 

DEBIT 

Expenses (statement of profit or loss) 

CREDIT 

Provisions (statement of financial position) 

In subsequent years, adjustments may be needed to the amount of the provision. The procedure to be 

followed then is as follows. 

(a) 

Calculate the new provision required. 

(b) 

Compare it with the existing balance on the provision account (ie the balance b/f from the 

previous accounting period). 

(c) 

Calculate increase or decrease required. 

(i) 

If a higher provision is required now:  

DEBIT 

Expenses (statement of profit or loss) 

CREDIT 

Provisions (statement of financial position) 

With the amount of the increase. 

(ii) 

If a lower provision is needed now than before: 

DEBIT 

Provisions (statement of financial position) 

CREDIT 

Expenses (statement of profit or loss) 

With the amount of the decrease. 

1.3 Example: provisions 

A business has been told by its lawyers that it is likely to have to pay $10,000 damages for a product 

that failed. The business duly set up a provision at 31 December 20X7. However, the following year, the 

lawyers found that damages were more likely to be $50,000.  

Required 

How is the provision treated in the accounts at: 

(a) 31 

December 

20X7? 

(b) 31 

December 

20X8? 

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