After preparing the trial balance and auditing the accounts, the balances of some accounts may be adjusted, and then adjustment entries called inventory settlement restrictions are prepared.
Inventory settlement restrictions
It is an accounting procedure represented in preparing entries for the settlement of some accounts and adjusting their balances in proportion to the changes that occurred in the account at the end of the financial period, with the aim of reaching the result of the project’s business in terms of profit or loss and the financial position in a correct manner.
It is an accounting procedure represented in preparing entries for the settlement of some accounts and adjusting their balances in proportion to the changes that occurred in the account at the end of the financial period, with the aim of reaching the result of the project’s business in terms of profit or loss and the financial position in a correct manner.
Inventory settlement of revenues and expenses:
Among the accounts that are inventoried and that may need to make settlement entries for them are the accounts of revenues and expenses, and according to the accrual principle, the revenues and gains that pertain to the current fiscal period are recognized, whether they were collected during the period or not, as well as the expenses and losses that pertain to the current fiscal period. Whether paid during the current period or not, that is, charging the current financial period with the revenues and expenses related to it, with the aim of reaching the real result of net income from profit or loss.
Among the accounts that are inventoried and that may need to make settlement entries for them are the accounts of revenues and expenses, and according to the accrual principle, the revenues and gains that pertain to the current fiscal period are recognized, whether they were collected during the period or not, as well as the expenses and losses that pertain to the current fiscal period. Whether paid during the current period or not, that is, charging the current financial period with the revenues and expenses related to it, with the aim of reaching the real result of net income from profit or loss.
Inventory settlement of expenses
Expenses can be defined as the amounts that are paid to obtain the service. When the facility pays the expense for the service, an account is opened in the name of the expense, which is recorded on the debtor side as follows:
Expenses can be defined as the amounts that are paid to obtain the service. When the facility pays the expense for the service, an account is opened in the name of the expense, which is recorded on the debtor side as follows:
Example
On 01/01/2015, Al-Salam Company paid an amount of 1000 dollars for health insurance expenses, and the required amount was paid in cash.
Required :
Recording the entry in the journal
Recording the entry in the journal
Solution method:
At the end of the financial period, the expense account appears in the income statement, deducted from the revenues of the current period, to know the result of the business's work, whether profit or loss.
Advance expenses:
After preparing the trial balance and reviewing the expenses account, it may become clear to the establishment that there are expenses that it has paid in the current period, but they relate to the next fiscal period. Then, according to the accrual principle, the amount paid for the next fiscal period is excluded and the current fiscal period is not charged with this expense by opening an intermediary account in the name of Expenses Prepaid is recorded on the debit side and the expense account is reduced by recording on the credit side
After preparing the trial balance and reviewing the expenses account, it may become clear to the establishment that there are expenses that it has paid in the current period, but they relate to the next fiscal period. Then, according to the accrual principle, the amount paid for the next fiscal period is excluded and the current fiscal period is not charged with this expense by opening an intermediary account in the name of Expenses Prepaid is recorded on the debit side and the expense account is reduced by recording on the credit side
The settlement is recorded by reducing the value of the expense by the value of the expense paid in advance
The expense account paid in advance is considered an asset account and appears at the end of the financial period in the statement of financial position (balance sheet).
On the assets side, not in the income statement.
Example
On 01/08/2015, Al-Salam Company paid an amount of 450 dollars in cash for an internet subscription for a year.
On 01/08/2015, Al-Salam Company paid an amount of 450 dollars in cash for an internet subscription for a year.
Required :
Recording daily entries for the year 2015.
Recording daily entries for the year 2015.
the solution:
There are two ways to prove expenses paid in advance as follows:
There are two ways to prove expenses paid in advance as follows:
The first method is to prove the paid expenses as prepaid expenses at the beginning:
The settlement is recorded by reducing the value of the expense by the value of the expense paid in advance
On 12/31/2015, the expense related to the current period is recognized, i.e. from 08/01 to 12/31, which equals 5 months, and the expense paid in advance is reduced.
12/450 * 5 = $187.5
2 Recording the reduction of the expense paid in advance by the value of the expense pertaining to the current period:
2 Recording the reduction of the expense paid in advance by the value of the expense pertaining to the current period:
The second method is to prove paid expenses as an expense at the beginning:
1 On 01/08/2015, the paid subscription value of $450 is recorded as an expense from the start:
On 12/31/2015, the paid expense is excluded from the next financial period, which is the period starting from 01/01/2016
Until 01/08/2016, which equals 7 months.
12/450 * 7 = $262.5
2 Recording and settling the value of the expense paid in advance by reducing the value of the expense:
2 Recording and settling the value of the expense paid in advance by reducing the value of the expense:
Notes on the solution:
Whether we use the first method or the second method, the balance of the internet expense account will appear at the end of the period with a value of $187.5 and will be closed in the profit and loss account (income summary) as will be explained in the coming lessons. The balance of the internet expense account paid in advance will appear at the end of the period with a value of $262.5 and the Recycle it to the next financial period as an asset.
Accrued expenses:
After preparing the trial balance and reviewing the expenses account, the facility may also find that there are expenses related to the current period, but they were not paid and did not appear among the expenses balance in the trial balance at the end of the period. According to the accrual principle, the current period must be charged with the expense by recording it on the debit side and opening An intermediary account in the name of accrued expenses recorded on the credit side as follows:
Whether we use the first method or the second method, the balance of the internet expense account will appear at the end of the period with a value of $187.5 and will be closed in the profit and loss account (income summary) as will be explained in the coming lessons. The balance of the internet expense account paid in advance will appear at the end of the period with a value of $262.5 and the Recycle it to the next financial period as an asset.
Accrued expenses:
After preparing the trial balance and reviewing the expenses account, the facility may also find that there are expenses related to the current period, but they were not paid and did not appear among the expenses balance in the trial balance at the end of the period. According to the accrual principle, the current period must be charged with the expense by recording it on the debit side and opening An intermediary account in the name of accrued expenses recorded on the credit side as follows:
Recording and settlement of the accrued expense
The accrued expenses account is considered one of the liabilities accounts (obligations), and it appears at the end of the financial period in the statement of financial position
(Balance sheet) on the liabilities side and not on the income statement.
Example
(Balance sheet) on the liabilities side and not on the income statement.
Example
On 12/31/2015, the balance of the salaries and wages expenses account shown in the trial balance equaled 10,000 dollars, and upon inventory it was found that the value of monthly salaries and wages was equal to 1,000 dollars.
Required :
Registration pending settlement on 31/12/2015
Registration pending settlement on 31/12/2015
Solution method:
The salary and wages expense to be paid for the year 2015 is equal to 12,000 dollars (1000 * 12 = 12,000 dollars), as shown in the example
The salary and wages expense to be paid for the year 2015 is equal to 12,000 dollars (1000 * 12 = 12,000 dollars), as shown in the example
The value recorded in the books was only 10,000 dollars, so an entry is recorded proving the value of the due expense at a value of 2,000 dollars.
Recording and settling the value of the expenses due
Revenue inventory settlement
Revenue can be defined as the amounts collected from others or due from others as a result of providing a service
Revenue can be defined as the amounts collected from others or due from others as a result of providing a service
Upon receiving an amount in return for providing the service, an account is opened in the name of the revenues, which is recorded on the credit side as follows:
Revenue recognition entry
Example
On 4/30/2016, Al-Salam Company received revenues in the amount of $3,000 instead of providing services, and the value was received in cash.
On 4/30/2016, Al-Salam Company received revenues in the amount of $3,000 instead of providing services, and the value was received in cash.
Required :
Recording the entry in the journal
Recording the entry in the journal
Solution method:
Recording income received in cash
Recording income received in cash
At the end of the financial period, the revenue account appears in the income statement to know the result of the business's work, whether profit or loss
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