Accruals, Prepayments and Depreciation

Question 1

What are Accruals?

Answer 1

When the expenses for the period are more than the cash paid during that period.

Question 2

What are Prepayments?

Answer 2

When the expenses for the period are less than the cash paid during that period. Basically, in advance payments.

Question 3

How do you calculate Prepaid and Accrued Expenses?

Answer 3

PAPA ALLA

Opening Period

Prepayment Add

Accruals Less

Closing period

Prepayment Less

Accruals Add

Question 4

What is the Accrual Convention?

Answer 4

Profit is the excess of revenue over expenses, not excess of cash receipts over cash payments.

Question 5

What is the Matching Convention?

Answer 5

Expenses should be taken into account in the same period of the revenue they helped generating.

Question 6

What is Depreciation?

Answer 6

Decrease of assets value because used b the firm

Question 7

What are the main Depreciation Methods?

Answer 7

Straight Line and Reducing Balance Method

Question 8

Straight Line Method description + Formula

Answer 8

The same amount is decreased each year (or each period decided).

(Cost - Residual Value)/ N. of expected years of life

Question 9

Reducing Balance Method + Formula

Answer 9

Reduced by a fixed percentage.

P = (1 - ⁿ√(R/C)) x 100

Where:

• C = Cost of Asset
• R = Residual Value
• n = N. of expected years of life