Chap 6 and 7 Income and Expenses Flashcards
Define the term income
Income refers to the amount earned through the activities of a business. It comprises revenue earned from selling goods and providing services and other income earned from other business activities.
Explain the difference between revenue and other income
Revenue is the amount of money earned from selling goods and providing services while other income is the amount of money earned from other business activities other than selling goods and providing services.
State and explain the accounting theory which is being applied when accounting for revenue and other income.
According to the revenue recognition theory, revenue is recognised and recorded as earned when goods are sold and delivered or when services are provided.
Define the term service fee revenue/income received in advance
Service fee revenue/ income received in advance refers to service fee revenue/income that is received, but not yet earned as the service has not been provided yet.
Define the term income receivable
Income receivable refers to income that is earned, that is, services have been provided but the amounts have not been received.
Define the term expenses
Expenses are costs incurred in the operation of a business to earn income in the same accounting period.
Explain the difference between cost of sales and other expenses
Cost of sales are costs of the inventory that was sold while other expenses are other costs incurred during the operation of the business to generate revenue and other income.
State and explain the accounting theory which is being applied when accounting for expenses
According to the matching theory, expenses incurred must be matched against income earned in the same period to determine the profit for that period.
Define the term expenses payable
Expenses payable refers to expenses that have been incurred, that is, businesses have used the services, but not paid yet.
Define the term prepaid expenses
Prepaid expenses refer to expenses that the business has paid in advance before services are used.
Accrual basis of accounting theory for income and expenses
According to the accrual basis of accounting theory, business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period. Thus, income must be recorded in the period when it is earned regardless of whether cash is received or not and expenses must be recorded in the period the services have been used regardless of whether they have been paid for or not.
