Accrual accounting recognises transactions and events when revenues are earned and expenses are incurred. For example interest earned at the end of an accounting period will be recorded even if the amount has not been received. That is, application of the matching principle. Although cash may not have been received, business records need to recognise that the revenue has been earned. If goods are sold on credit on 25 June 2018 but the account Is not paid until 10 July 2018 the sale is still recognised on 25 June 2008. This means it is Included as income for the period ended 30 June 2018 and not when the money is received. Balance day adjustments allows matching principle to be carried out. Adjustment entries facilitate a better matching of revenues and expenses. Ensures a more accurate profit figure for the period. Adjustments are carried out at balance day before revenues and expenses are closed to P& L account. Balance day adjustments are general journal entries made as at balance day in order to compare (match) the revenues and expenses accurately so that the profit (loss) can be determined.
BAD DEBTS
If a business allows sales on credit, it Is normal to expect that some of these will not be paid. Bad debts are recognised as soon as they occur.
Bad debts are an expense to the business.
Eg. A firm is owed $990 by B. Payless and his solicitor has advised that he Is bankrupt and will be unable to repay the debt.
General Journal
2016 Ledger Accounts Debit S Credit $ 30/6 Bad debt GST Collected Debtors control account (B Payless) Being debt owing by B Payless written off due to bankruptcy
If the bad debt relates to a previous accounting period then the Bad debt account should be closed to the Allowance for doubtful debts if the business has made such an allowance.