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Paying insurance in advance is a prepayment, which is an asset for the company and, therefore, should be recorded on the balance sheet as the company is currently doing. All prepaid expenses should be recorded in the company’s balance sheet until they are consumed, according to IASB. They are recorded as current assets to the company until the period in which they have catered for lapses.
At the point of payment;
Dr – prepayment account
Cr – Bank/Cash account.
On the other hand, research and development and advertising expenditures are expenses that should not be recorded on the balance sheet. Expenses of this kind and other expenses should be recorded in the Income or Profit/Loss Statement. The two expenditures given are revenue expenditures, and according to IFRS, they are recorded in the income statement as expenses. They are revenue expenditures because their benefit will only be felt in a single accounting period and hence are recorded in that one single accounting period.
Dr – P&L (expense) account
Cr – Bank/Cash account.
The applicable concept here is going concern concept. The existing going concern concept assesses whether a company would avoid liquidation in the short term, with a focus on cash flows. The company seems to be a going concern entity with no intention to liquidate soon. She has been with them for the past eight years. The company wants to be well-prepared for future accidental injuries. A contingency is usually a result of situations whose outcome is uncertain and which should be resolved in the future and have a possibility of creating a loss. Accounting for the same, it is important to recognize the loss amount, which is probable, and this amount can be estimated in books of account. They will create a contingent account where they will be setting aside the 300,000.
Dr – Miscellaneous legal expense
Cr – Accrual
The building that the company sold to the bank should be treated as a sale in as much as it is not a smart move. This is because the ownership of the building is transferred to the bank, and the company will not have the previous rights they hand over the land and building. The following are the accounting entries that should be put into place:
Dr – Bank Account
Cr – Land & Buildings
On the rental payments, which are an Expense. The company should;
Dr – Expense account (Rent)
Cr – Bank Account.
If the company buys it back, it should;
Dr- Land & Buildings with the purchase cost
Cr – Bank
The voluntary redundancies which had been suggested by the board should be recognized and recorded. This will be a post-balance sheet event; it has to be captured after the accounting period. The company will increase its liability provisions to cater to the same when it happens. The amount to be recorded in the balance sheet will depend on what the board will decide on.
Money received with advance orders should not be recorded immediately as income. The treatment here is wrong. This is an advance payment. It is not an income yet as the sale has not happened. It is, however, a liability until the customer gets the software products in question. It ought to have been treated as below;
Dr – bank account
Cr- Advance payment (customer’s name)
For the case in court due to the faulty software, the company needs to make a provision of this contingent liability in the books despite the lawyer’s advice. If the company doesn’t end up paying, then the provision is cleared and can be deleted from the books of account.
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