Accruals & Prepayments & Depreciation

Question 1

Accruals

Answer 1

• the accruals increase the expense recorded
• accruals are owing at the date of the statement of financial position
• amounts are due for payment in < 1 year
• are current liabilities
• in SOFP

Question 2

Prepayments

Answer 2

• prepayments decrease the expense recorded
• prepayment entitle the business to a service at the date of the statement of financial position
• are current assets
• in SoFP

Question 3

Adjustments to Trial Balance

Answer 3

1. Inventories
2. Accruals
3. Prepayments
4. Depreciation

Question 4

Matching Accruals

Answer 4

when the association with income can only be broadly or indirectly determined, expenses are recognised in the SOPL on the basis of systematic and rational allocation procedures.

Question 5

Issues with Accruals and Prepayments

Answer 5

-the calculation is made from a later or earlier invoice
-this is verifiable information
(more an item can be verified, the better quality the financial information is)

Question 6

How to account income received in advance or arrears?

Answer 6

Accrued income (Asset) for income in arrears:
DR accrued income
CR income

Deferred Income (Liability) for income received in advance:
DR Income
CR deferred income

Question 7

What is the cost of an asset given by?

Answer 7

• all costs incurred by the entity to bring the asset to its required location
  Includes:
• delivery costs
  -installation costs
  -legal expenses (transfer of legal titles)

Question 8

Define tangible non-current assets

Answer 8

initially recorded as a cost; evidence of the cost is usually provided by the purchase invoice

• have finite useful life:
  
  • wear out in use
  • wear out over time
  • become obsolete

economic benefits inherent in the asset are reduced

Question 9

Problems when forecasting expected economic life of an asset

Answer 9

• difficult to determine the rate of progress of technology

- difficult to predict the changes in demand e.g. customer tastes/ needs

Question 10

Depreciation Principles

Answer 10

• non-current assets are used up during the process of generating the revenues recognised during a specific time period
• match economic benefit consumed (cost) against revenues recognised in SOPL
• reduce the carrying amount of the asset in SOFP

regardless of whether historical cost or valuation is used, all tangible non-current assets are depreciated.

note: LAND does NOT depreciate- infinite life

Question 11

What is allocation

Answer 11

using depreciation to spread the cost of a fixed asset over its useful life
*not a cash flow

Question 12

What are intangible non-current assets

Answer 12

initially recorded at cost
-economic benefit and useful life are sometimes predetermined
-by law for patents and trademarks
- by legal contract for licenses
usually, have a finite useful life as economic benefit is reduced = Amortisation

Question 13

Measuring depreciation for a period

Answer 13

four factors to be considered:

• the cost/ value of the asset
• the useful life of the asset
• the residual value (disposal value) of the asset
• the depreciation method

Question 14

define residual value

Answer 14

the estimate of the value that the asset may have at the end of its economic useful life

(must be deducted from the cost of the asset)

Question 15

Measuring Depreciation Principle

Answer 15

the allocation of cost should reflect the consumption pattern of asset’s economic value

Question 16

Depreciation methods

Answer 16

1. Straight line method
   - allocated depreciation evenly over the economic useful life of an asset
2. Reducing Balance Method
   - applying a fixed percentage role to the net book value of the asset each year.
   - higher in early years lower in later years

Question 17

Profit/Loss on Disposal on non-current assets

Answer 17

NBV > sale proceeds = loss on disposal

NBV < sale proceeds = profit on disposal

Question 18

Advantages and disadvantages of straight-line method

Answer 18

Advantages

• easier to understand
• computations are simpler than other methods.
• gives the same charge for depreciation in each year of the asset’s useful life
• more appropriate for assets which are depleted as a result e.g. such as buildings and patents.

Disadvantages
- may not give an accurate depiction of usage of an asset

Question 19

Advantages and disadvantages of reducing balance method

Answer 19

Advantages:

• gives a decreasing annual charge for depreciation over the useful life of an asset.
• more appropriate for assets which deteriorate primarily as a result of usage e.g. plant and machinery and motor vehicles.

Disadvantages
- the computations are more complex and difficult to understand.

Question 20

define accruals basis of accounting

Answer 20

• the effects of transactions and other events are recognised when they occur, not as cash or its equivalent is received or paid
• provides useful information to users as it identifies the pattern of business transactions rather the flow of cash.