Balance Day

Question 1

Balance Day Adjustments

Answer 1

Balance Day Adjustments satisfy the principle of Reporting Period as they ensure that revenues earned are matched against expenses incurred within the same reporting period to allow for an accurate net profit to be calculated.
Creates relevance as all information that is useful for decision making is included in reports such as the income statement, while excluding information that is not useful or is not in the current RP.

Question 2

Carrying value

Answer 2

The portion of a non current asset that is yet to be consumed/depreciated including its residual value

Question 3

Why do we close revenues and expenses to the profit and loss summary?

Answer 3

Revenue and expense accounts must be closed to the profit and loss summary to allow for an accurate net profit to be calculated by matching expenses incurred against revenues earned, and to set all accounts to 0 to be ready for the next reporting period. This is so that the calculation of profit only includes those revenue and expenses that relate to the current RP.

Question 4

Depreciation

Answer 4

The allocation of the cost of a non current asset over its useful life.
It refers to the reduction of an assets value over time as its ability to earn revenue decreases.
Measured by:
HC - RV
———–
Life
A depreciation expense is the part of the cost of a non current asset that has been consumed in the current reporting period.
PURPOSE- to ensure that an accurate net profit is calculated