AVBK - Advanced Bookkeeping

Question 1

When do we need to prepay or accrue income?

Answer 1

Income must be accounted for in the period to which it relates. Income that has not been received by the end of the financial year must be accrued, and is an asset at the year-end. Income that has been received in the year but relates to the next year is prepaid income and is a liability at the year-end

Question 2

When do we need to prepay or accrue expenses?

Answer 2

Expenses must be accounted for in the period to which they relate.

Expenses that have not been paid by the end of the financial year must be accrued and are a liability at the year-end.

Expenses that are paid for in the year but relate to the next year are prepayments and are an asset at the year-end.

Question 3

How are income or expenses allocated when calculating prepayments or accruals?

Answer 3

Income or expenses relating to two accounting periods must be allocated, pro-rata, to the two periods. The calculation for each of the two periods is:

Income or Expense / Months to which the income or expense relates x Months in the period

Question 4

What are suspense accounts and what are they used for?

Answer 4

A suspense account is an account in the general ledger where amounts are temporarily recorded until the proper account for the entry has been identified. If a trial balance does not balance then the difference is posted to a suspense account and then investigated.

Question 5

What methods of depreciation can a business use?

Answer 5

The three main methods of depreciation that a business can use are:

Straight-line – an equal amount of the asset’s value is charged to each period.

Diminishing balance – a set percentage of the asset’s carrying value is charged to each period.

Units of production – based on the number of units produced in the period as a proportion of the total number of units the asset is predicted to produce in its useful life.

Question 6

Straight line vs diminishing balance depreciation

Answer 6

Using straight line depreciation, an asset’s value is shared equally over the useful life of the asset. Using diminishing balance, the depreciation % is applied to the carrying value of the asset, which means that the depreciation charge in the earlier years is higher than in later years.

Question 7

What if the asset has a value at the end of its useful life?

Answer 7

Often, at the end of an asset’s useful life, it will have a residual value. This is an estimate of the amount the asset could be sold for when the business decides to dispose of it. If a business uses straight-line depreciation this should be subtracted from the cost of the asset before calculating the depreciation.

Question 8

Accumulated depreciation - What is the double entry?

Answer 8

The journal to post the depreciation for the year is:

Dr Depreciation expense
Cr Accumulated depreciation

The balance on the accumulated depreciation account is the total depreciation charged on an asset since it was purchased.

Question 9

Doubtful debts - What are they and how do we provide for them?

Answer 9

If a business is uncertain about whether a debt will be paid, the debt is ‘doubtful’, and it must make an allowance for doubtful debts. This can be a specific allowance that relates to a known doubtful debt, or a general allowance that is calculated as a percentage of total trade receivables after writing off irrecoverable debts and any specific doubtful debt allowances

Question 10

Irrecoverable debts - What do we do when we know a debt will never be paid?

Answer 10

An irrecoverable debt is an amount owing to a business that it does not believe will ever be paid.

This must be written off in the business’s accounts:

Dr Irrecoverable debts
Cr Trade receivables

The irrecoverable debt is an expense in the business’s statement of profit or loss.

Question 11

Extended trial balance (ETB): profit or loss. How do you tell?

Answer 11

A profit will credit the statement of financial position columns, a loss will debit.

Question 12

The accruals basis of accounting. What is it?

Answer 12

Matches income and expenditure to the period in which it occurs, irrespective of when the cash actually changes hands. This means that all of January’s income and expenses must be allocated to January, even if some invoices are not paid until February, or some goods were bought in December.

Question 13

What is included in Capital expenditure & what is not?

Answer 13

Included:

• Asset purchase price
• Alteration costs to make asset usable
• Legal fees with purchasing asset (i.e property)
• Non-refundable taxes & duties
• Site preparation costs
• Delivery costs
• Installation costs
• Testing costs

Not included:
- Repairs, maintenance, cleaning, insurance & power/fuel (These relate to revenue expenditure as they are one off’s that will be for less than a year at a time)

Question 14

What details would you expect to see on the non-current asset register?

Answer 14

 Description/serial number
 Acquisition date
 Original cost
 Depreciation
 Net book value
 Funding method
 Disposal date
 Disposal proceeds

Question 15

What are tangible & intangible assets?

Answer 15

Tangible assets are those with physical form, the assets which we can actually touch whereas intangible assets are those without a physical substance.

Question 16

What is IAS 16?

Answer 16

IAS 16 is the International Accounting Standard 16, the accounting rule that tells us how to deal with non-current assets. It gives us a formal definition of what depreciation is and describes it as ‘the measure of the economic benefits of the tangible non-current assets that have been consumed during the period’. Essentially it looks at how much the asset is wearing out and losing value over time.

Question 17

How would you journal depreciation?

Answer 17

Dr Depreciation expense (statement of profit or loss)

Cr Accumulated depreciation (statement of financial position)

Question 18

How would you know if you have a profit or loss on disposal?

Answer 18

If proceeds are greater than the NBV we get a profit on disposal.

If proceeds are less than the NBV we get a loss on disposal.

Question 19

How would you dispose of an asset?

Answer 19

Step 1 - Transfer the whole cost of the asset from the Non-current asset account to disposal account:

• Dr Disposal account
• Cr Non-current asset cost

Step 2 - Remove any accumulated depreciation & transfer to disposal account:

• Dr Accumulated depreciation
• Cr Disposal account

Step 3 - Post any sales proceeds to the disposal account:

• Dr Cash
• Cr Disposal account

Question 20

Part exchange an old asset for a new one. How would you account for that?

Answer 20

Do steps 1-3 to remove old asset for disposal & then step 4:

• Dr Non-current asset cost (for the new asset)
• Cr Disposal account (as though sale proceeds)

Question 21

How are accruals posted as double entry?

Answer 21

Dr Expense (statement of profit or loss)
Cr Accrual (statement of financial position)

Question 22

How is a prepayment posted as double-entry?

Answer 22

Dr Prepayment (statement of financial position – current asset)
Cr Expense (statement of profit or loss)

Question 23

If accounting for an accrual or prepayment the following year, how would this be posted?

Answer 23

To reverse an accrual:

• Dr Accrual
• Cr Expense

To reverse a prepayment

• Dr Expense
• Cr Prepayment

Then follow a 3 step process:
Step 1 – Reverse out last year’s accrual or prepayment
Step 2 – Post any cash paid this year
Step 3 – Post any closing accrual or prepayment

Question 24

What is deferred income and how is it accounted for?

Answer 24

Deferred income (also known as deferred revenue, unearned revenue, or unearned income) is, in accrual accounting, money received for goods or services which have not yet been delivered. The business therefore has received some cash but owes the customer for the service to be 
delivered at a later date. As the service is owed this is a liability on the statement of financial position.

• Dr Sales (P/L to reduce the revenue for the period)
• Cr Deferred income (SFP liability created for the service which is owed)

Question 25

What is accrued income and how is it accounted for?

Answer 25

Accrued income is income earned but not yet received. This will be an asset at the end of a period as the work has been done but the income not received. The income will need to be included in the sales for the period in question.

• Dr Accrued income (SFP to recognise the asset for the income earned but not yet received)
• Cr Sales (P/L to increase the sales income)

Question 26

IAS 2 Inventory

What is closing inventory and how would this be accounted for?

Answer 26

The adjustment for inventory is a period end adjustment, we refer to this as a closing inventory adjustment.

To make a closing inventory adjustment we post the following double entry:

• Dr Inventory (SFP)
• Cr Closing inventory (P/L)