Balance Day Adjustments

Question 1

Purpose of Balance Day Adjustments:

Answer 1

Ensure that elements are recognised in the correct accounting period. (Matching Principle)

Question 2

Reasons for balance day adjustments:

Answer 2

• Prepayments
• Accruals
• Provisions

Question 3

What are prepayments?

Answer 3

Business has either paid an expense in advance or received income early.
- Prepaid expense
- Income in advance

Question 4

What are accruals?

Answer 4

The business owes money and has not paid it yet or is owed money by another business.
- Accrued Expense
- Accrued Income

Question 5

What are provisions?

Answer 5

Adjustments for depreciation and bad debts.

Question 6

All types of balance day adjustments:

Answer 6

• Accrued Expense
• Prepaid Expense
• Accrued Income
• Income in advance
• Doubtful Debts
• Depreciation

Question 7

Accrued Expense: (Liability)

Answer 7

A payment which has not yet been made by business but is owed.
- Telephone Bill

Question 8

Prepaid Expense:
(Asset)

Answer 8

Business has paid an expense in advance.

Question 9

Accrued Income:
(Asset)

Answer 9

Income which has been earned but has not been received by the business.
- Rent

Question 10

Income in advance:

Answer 10

Income which has been received but has not been earned by the business.
- Subscription

Question 11

Doubtful Debts:

Answer 11

Based on an estimation it is a provision made which results in the profit figure being more conservative in case of a bad debt occurring.

Question 12

Depreciation:

Answer 12

An allocation process of spreading the cost of the asset over the period of time the asset is used to generate income.