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ADJUSTMENTS
PRE-PAID EXPENSES / EXPENSES PAID IN ADVANCE
  
Certain expenses or a portion of an expense has been paid in advance. In the financial statements all expenses must be shown for a period of one year or 12 consecutive months. The expense account must be adjusted at the end of the financial year to reflect the correct expenses for the financial year. The amount of the expense will decrease in the books of the business and an asset is created - Prepaid expenses. It is regarded as an asset to the business at the end of the financial year as the expenses are already paid for and will be used in the next financial year.

To Identify, Enter the Transaction and to Post the Transaction to the Ledger:

Identify the account and calculate the prepaid expenses or the expenses paid in advance. For example, after analysing the pre-adjustment trial balance, it is discovered that the rates and taxes is reflected as R()1 300. The monthly rates and taxes amounts to R()100 per month. The payment made for rent was in respect for March. The rates and taxes expense has been paid for 13 months.

 

The expense for the rates and taxes is already paid for in the current financial year for 13 months. Only 12 months is applicable to the current financial year. The payments for one month, which is the expense for March is a current asset for the business as at the end of the financial year as the benefit for the expense must still be received in the next financial year. To have the correct expenses reflect in the financial statements, the rates and taxes for the future period must be taken out of the expense account and transferred to the prepaid expenses account.
Enter the transaction in the General Journal. Press the key on your keyboard or click on the speed button or icon. The Batch Type selection screen will be displayed.
Select the General journal Batch Type and click on the button. The General journal Batch Entry screen will be displayed. If the correct contra account for the batch was not displayed on the Batch Type selection screen, press the key on your keyboard or click on the speed button or icon to set the options for this batch. Note that it is recommended that the Amount Entry field be set to allow both (debit and credit).
Enter the transaction in the batch. After entering the transactions in the general journal, the transactions is as follows:

Minimise button - inactive. Restore button - click to display this screen to full size and click again to restore it to its original size. Title bar - double-click to display the screen in full size or to return to the normal size. Title bar. The name of the selected batch. Title bar. The Alias for the selected batch. Close button - Click to close or exit this screen. Click to delete a selected transaction. Click to insert a row or line above a selected transaction. Click to balance the batch, if the batch is not already in balance. Click to post or update the transactions to the ledger, if the batch is in balance. Click to enter transactions Inclusive or Exclusive of VAT. Click to list the entries or transactions entered into the batch. Click to access more processing options for the batch. Click to set the Options for this batch. Enter the reference number for the transaction. Enter or select the date of the transaction. Enter a description for the transaction. Select the Prepaid Expenses (Current Assets) account for the debit transaction and select the Expense account for the credit transaction. Enter the debit amount for the Prepaid Expenses (Current Assets) account. Enter credit amount for Expenses account. Scroll bar - scroll to view more transactions entered in the batch.
Click on the speed button or icon or press the key on your keyboard. Select the change the alias option.
Click on the speed button or icon or press the key on your keyboard to post the transactions to the ledger. After posting the transactions to the ledger, the entries should reflect as follows in the ledger.



The expense accounts will result that the net profit be increased by the expense of R() 100, which is already paid as at the end of the financial year (28/29 February). It has also increased the current assets, as it is an expense, which has already been paid for the new financial year. Consequently, an expense of R ()1 200 will be recognised as an expense and not R() 1 300.

The benefit for the expense will be received in the next financial year during March out of the Accrued Expenses account, which is a current asset. The amount that should have been paid for the financial year is the amount on the pre-adjustment trail balance less the amount of the payment in advance. The expenses are reduced (credited) and current assets are increased (debited).

Once these transactions have been processed and you have done the Year-end process in the Tools - Global Processes - Do Year-end menu option, you need to reverse these adjustments in the new financial year. The reason for this is that these adjustments have served its purpose in the old financial year to assist you to generate the correct final financial statements.