Recording Transactions and Events
The main adjustments
Accruals (amounts incurred or earned but not invoiced) increase the expense and create a liability; prepayments reduce the expense and create an asset. Both reverse in the next period.
Depreciation allocates the depreciable amount of a non-current asset over its useful life: straight line = (cost − residual value) ÷ useful life; reducing balance = carrying amount × rate. Charge from the date of acquisition according to the stated policy, and on disposal remove cost and accumulated depreciation and recognise the profit or loss on disposal.
Irrecoverable debts are written off (Dr expense, Cr receivables). An allowance for receivables is a valuation adjustment (Dr expense, Cr allowance), adjusted for increases, decreases and use against specific debts. Inventory is measured at the lower of cost and net realisable value (IAS 2); cost includes purchase price, import duties and carriage inwards, but not selling costs.
Sales tax collected is a liability to the tax authority, never income. Trade discounts are deducted before recording; settlement discounts are recorded separately. Provisions are recognised where a present obligation is probable and can be measured reliably; contingent liabilities are disclosed only.
Traps: depreciation is not a cash fund and land is not depreciated; an allowance is deducted from receivables in the statement of financial position, not shown as a liability; carriage inwards is part of inventory cost, carriage outwards is a distribution cost.
Worked example: a machine costing $12,000 is bought on 1 July; year end 31 December; depreciation 25% reducing balance. Charge = $12,000 × 25% × 6/12 = $1,500; carrying amount $10,500.