Accounting U4 AOS1

Question 1

Bad debts

Answer 1

expense account created when accounts receivable are written off as irrecoverable

Question 2

Allowance for doubtful debts

Answer 2

negative current asset based on predictions of future bad debts
- Created if there are patterns of non-payment
- Usually a percentage of credit sales

Question 3

Characteristics relating to recording bad and doubtful debts

Answer 3

Faithful representation – acknowledges management doesn’t expect to collect all amounts owing by accounts receivable, but doesn’t necessarily faithfully represent an economic event as it is based on an estimate

Relevance – potential losses are relevant to decision making, recognises potential for credit sales not to be collected which can more faithfully represent a situation

Verifiability – doesn’t uphold; simply an estimate

Question 4

Assumptions relating to recording bad and doubtful debts

Answer 4

Accrual basis assumption or period assumption – allowance for doubtful debts is prepared to recognise the bad debts expense in the period in which the sale is recognised; ensures amount that’s unlikely to be collected is recognised and bad debts are determined for the period to calculate profit

Going concern assumption – allowance is prepared to recognise not all credit sales from current reporting period will be collected in future periods  business will continue indefinitely into future

Question 5

Depreciation

Answer 5

the allocation of the cost of a non-current asset of its useful working life

Question 6

Carrying value

Answer 6

Represents the future economic benefits owed to the business, plus any scrap value (cost – accumulated depreciation)

Question 7

Accumulated depreciation

Answer 7

total amount of depreciation written off

Question 8

Scrap value/residual value

Answer 8

the estimated worth of an asset after it’s been fully depreciated

Question 9

Reducing balance method

Answer 9

allocates more depreciation in the earlier years of an asset’s life, and less in its later years
- earlier years –> greater revenue earning capacity
- aims to match the depreciation expense with the revenue earning pattern of the asset to determine an accurate profit

Question 10

Characteristics relating to reducing balance

Answer 10

Relevance – if an asset is expected to earn more in a particular period, relevance requires more depreciation to be allocated

Faithful representation -

Question 11

Assumptions relating to reducing balance

Answer 11

Period assumption – revenue earned in a period is matched with the expenses incurred in that same period; if an asset earns more revenue one year its logical to allocate more depreciation

Question 12

Differences with reducing balance and straight line

Answer 12

• straight line allocates the same amount of dep’n each year, reducing balance does not
• reducing balance doesn’t use the residual value in the calculation of depreciation whereas in straight line, the residual value is a vital factor

Question 13

Steps for disposal of a non-current asset

Answer 13

• Transfer cost of asset to Disposal of Asset ledger
• Transfer accumulated depreciation of asset to Disposal of Asset ledger
• Record proceeds from sale of the asset (or trade-in) in the Disposal of Asset ledger
• Close off Disposal of Asset ledger by transferring profit or loss to the Profit/loss Asset ledger

Question 14

Reasons for loss on disposal of asset

Answer 14

• Under-depreciation
• Residual value was overstated
• Item is no longer popular
• Technologically obsolete

Question 15

Reasons for profit on disposal of asset

Answer 15

• Over-depreciation
• Residual value understate

Question 16

Balance day adjustments

Answer 16

adjustments made to revenue and expense accounts so they equal revenue earned, and expenses incurred
- Ensures profit is determined accurately under method of accrual accounting

Question 17

Assumptions relating to balance day adjustments

Answer 17

Period assumption – Divides indefinite of a business into periods of time over which its performance (profit or loss) can be measured. Last day of period is balance day.

Accrual basis assumption –
- profit is defined as revenue less expenses.
- Recognises business can earn revenue in one period, and receive the cash in a future or past period
- Recognises some cash payments relate to items owing from previous periods, or paid in advance for future period

Question 18

Characteristics relating to balance day adjustments

Answer 18

Relevance – relevance applied to determine which revenue and expenses will be included in profit determination

Faithful representation

Question 19

Prepaid expenses

Answer 19

expenses paid during period, but not yet incurred
- Expense paid in advance hasn’t been consumed
- Economic benefit is yet to be used so an asset is created
- Current asset

Question 20

Accrued expenses

Answer 20

expenses that have been incurred in a period, but not paid, remaining as liabilities on balance day
- Not recorded as an expense when paid off
- When paying off an expense in subsequent period separate accrued expense from expense
- Don’t debit expense account with total paid

Question 21

unearned revenue

Answer 21

revenue that has been received in advance, but not yet earned
- Business hasn’t fulfilled obligation to provide goods or services customers have paid for
- Treated as a current liability; receiving revenue in advance creates an obligation of future economic sacrifice
- As commitment is fulfilled, liability is eliminated

Question 22

Accrued revenue (revenue owing)

Answer 22

revenue earned but not yet received