I'm having problems with a study question. On last day of financial year a company sold one asset and sold another. The invoice was not paid for before the Year End and the money for the sold asset was not received until after the Year End.
Am I correct in thinking that I need to raise an accrual for the purchase invoice and a prepayment for the sales invoice?
How do I make the adjustments to show any profit/loss on the disposal of the asset and should I calculate a full year's depreciation on the asset bought on the last day of the financial year.
I guess you mean "bought one asset and sold another".
Double entry for the transactions (excluded any VAT issues)
1. Asset Bought
Dr Fixed Asset Cost
Cr Creditors (as not paid)
2. Asset Sold
Dr Debtors (as not received)
Cr Fixed Asset Cost (with original purchase price)
Dr Fixed Asset Depn (with depn to date on asset sold)
Cr Gain on Disp or Dr Loss on Disp (to P&L) depending if the sales proceeds is more or less than the Net cost removed from fixed assets.
No adjustment for accruals or prepayments as the transaction happened in the year and the sale invoice and purchase invoice should be recorded in that year.
Regarding whether should be full years depn on asset bought there is no right or wrong answer. Some people apply the approach full years depn in year of acquisition and none in year of disposal. Others would pro-rata. Personally i would use the common sense approach. Wouldnt make sense to depreciate an asset for a full year if just bought on the last day of year so in practice i wouldnt depreciate. If for no other reason that it saves you working it out and posting the journal.
