TT6 Adjustment for Accruals

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:

Accounting Equation
Adjustment for Accrual for Water and Electricity Increase in Current Liabilities (+)
Decrease in Retained Earnings (-)
> Enter accrual value from 300 to 200 in field: “Change to”
> 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
Balance Sheet Y1
Balance Sheet
Original After Changes
Current Assets  767,850  767,850
Bank 758,550 758,550
Debtors and Prepayments 9,300  9,300
Other Current Assets (Stock)  0  0
Fixed Assets 44,000  44,000
TOTAL ASSETS 811,850 811,850
Current Liabilities  44,300  44,200
Creditors  44,000  44,000
Accruals 300 200
Long Term Liabilities  0  0
Long Term Loan 0  0
Equity  767,550   767,650
Shareholders’ Equity 800,000 800,000
Income Statement -32,450  -32,350
TOTAL Liabilities + Equity + Retained Earnings 811,850 811,850
Current Ratio (CR) → Current Assets (CA) / Current Liabilities (CL) → CR = CA / CL

An analysis of financial ratios can be seen here.
Current ratio calculations are as follows:

Calculation of Current Ratio
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.