6) Balance Day Adjustments

Question 1

What is the accrual basis of accounting

Answer 1

The accrual basis of accounting recognises transactions and events when they have an economic impact on the entity, rather than when the associated cash flow occurs.

Question 2

What is the cash basis of accounting

Answer 2

Cash accounting is the process of recording transactions when cash is received or paid and is measured at that time as income, expenses, asset purchases or cash received from loans/additional capital.

Question 3

What is an asset

Answer 3

An asset is a future economic benefit controlled by the entity as a result of past economic events or transactions

Question 4

What is a liability

Answer 4

A liability is a present obligation of the entity to transfer an economic resource as a result of past events

Question 5

What is equity

Answer 5

Equity refers to the residual interest in the assets of an entity after deduction of its liabilities.

Question 6

What is income

Answer 6

Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from the owner

Question 7

What is expenses

Answer 7

Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to the owner.

Question 8

What is the purpose of balance day adjustments

Answer 8

The overarching purpose of balance day adjustments is to ensure that elements are recognised in the correct accounting period, that is, an expense is reported on the income statement in the period in which the related income is earned.

Question 9

Why do balance day adjustments occur

Answer 9

1. Prepayments
2. Accruals
3. Provisions

Question 10

What are doubtful debts

Answer 10

Doubtful debts are an estimate of the amount of income unlikely to be received in the current accounting period.