Accounting U4 AOS1 Flashcards
Bad debts
expense account created when accounts receivable are written off as irrecoverable
Allowance for doubtful debts
negative current asset based on predictions of future bad debts
- Created if there are patterns of non-payment
- Usually a percentage of credit sales
Characteristics relating to recording bad and doubtful debts
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
Assumptions relating to recording bad and doubtful debts
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
Depreciation
the allocation of the cost of a non-current asset of its useful working life
Carrying value
Represents the future economic benefits owed to the business, plus any scrap value (cost – accumulated depreciation)
Accumulated depreciation
total amount of depreciation written off
Scrap value/residual value
the estimated worth of an asset after it’s been fully depreciated
Reducing balance method
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
Characteristics relating to reducing balance
Relevance – if an asset is expected to earn more in a particular period, relevance requires more depreciation to be allocated
Faithful representation -
Assumptions relating to reducing balance
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
Differences with reducing balance and straight line
- 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
Steps for disposal of a non-current asset
- 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
Reasons for loss on disposal of asset
- Under-depreciation
- Residual value was overstated
- Item is no longer popular
- Technologically obsolete
Reasons for profit on disposal of asset
- Over-depreciation
- Residual value understate
Balance day adjustments
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
Assumptions relating to balance day adjustments
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
Characteristics relating to balance day adjustments
Relevance – relevance applied to determine which revenue and expenses will be included in profit determination
Faithful representation
Prepaid expenses
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
Accrued expenses
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
unearned revenue
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
Accrued revenue (revenue owing)
revenue earned but not yet received
