Typical Transaction 6
Example: Adjustment for Accruals – Change accrual amount from 300 to 200
The entries for this transaction in the Accounting System can be seen here, in the AccountingLab and in the Accounting System, Operation O9B, M1:
|Adjustment for Accrual for Water and Electricity||Increase in Current Liabilities (+)|
|Decrease in Retained Earnings (-)|
> Double entry: Debit entry, loss in Retained Earnings balance decreases from -32,450 to -32,350. Credit entry, Accruals balance decreases from 300 to 200
> Values in red show Balance Sheet values before and after changes
|Debtors and Prepayments||9,300||9,300|
|Other Current Assets (Stock)||0||0|
|Long Term Liabilities||0||0|
|Long Term Loan||0||0|
|TOTAL Liabilities + Equity + Retained Earnings||811,850||811,850|
An analysis of financial ratios can be seen here.
Current ratio calculations are as follows:
|Bank||Current Assets||Accruals||Current Liabilities||Income Statement||Equity||Current Ratio|
|Balance Sheet Original||758,550||767,850||300||44,300||-32,450||767,550||767,850 / 44,300 = 17.3|
|Balance Sheet New||758,550||677,850||200||44,200||-32,350||767,650||767,850 / 44,200 = 17.4|
When adjusting for accruals from 300 to 200 in this example, the following changes in the Balance sheets (B/S) and the Income Statement occur:
– Accruals in Current Liabilities decreases from 300 in the original B/S to 200 in the new B/S. Thus, Current Liabilities decrease correspondingly from 44,300 to 44,200.
– Current Ratio changes slightly from 17.3 in the original B/S to 17.4 in the new B/S. The new accruals amounts are small in the example, however, when accruals are much greater it would have an important impact in the liquidity and the profit/loss of the company. Assuming that utilities expenses in electricity, water, communications are high, such as in large industrial installations, electric trains, etc., then their accruals would be correspondingly high and if revenue does not happen to cover these expenses the risk of insolvency looms. In this case efficient cash management must monitor closely the flow of revenue to be always able to pay for this type of expenses.
– Losses in the period due to additional accruals diminish from -32,450 in the original B/S to -32,350 in the new B/S.
– Equity increases from 767,550 in the original B/S down to 767,650 in the new B/S due to a lesser loss on accruals.
– There are no changes in Assets as adjustments of accruals has no impact in Assets items, namely, Cash at Bank, Debtors and Prepayments, Inventory (Stock), Fixed Assets
– There are no other changes in Current Liabilities, only accruals. Creditors do not change with adjustment for accruals.
– There are no changes in other Liabilities, such as Long Term Loans.