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Instead of increasing expenses by $1 million in current year, can we reduce sales? Does it matter?
prior period example:
– why is the 2.4 million not deducted from retained earnings from previous period?
– why is the 2.4 million deducted from receivables of current period and not prior period?
Patrick!
Coz, prior period SPL is closed and you cannot do any adjustments once the financial statements are finalized and posted. ( P/L) items are not brought forward to the the next year.
But as far as SFP is concerned, the items and the figures in the SFP brought forward to the next year as well.
Hope it clears.
but this adjustment of opening balance receivables will definitely affect the current year income.
because as you credit receivables and debit SOCI the current income would be debited as well. so how do you do this?
Great lecture thank you Chris!
I couldn’t work out how the debit entries worked here because receivables are usually increased when we debit the receivables and credit the sales. So how does the reversal work by debit entry on expenses? Also could you explain how prior period receivables are settled against soce?? Thanks..
Hi,
The initial sale has already been made, which will have created the receivable. The receivable is now no longer collectible, so needs to be removed. To remove the asset we need to credit it, and the other side will go to an expense account, for those sales generated in the current year.
Any sales from previous periods, then the debit entry goes through the SOCE, as an adjustment to the opening retained earnings.
Thanks