CHAPTER 10 Flashcards
Balance day adjustment
A change made to a revenue or an expense account on balance day so that revenue accounts show revenue earned and expense accounts show expenses incurred in a particular reporting period.
Purpose of BDAs
The purpose of a balance day adjustment is to ensure that profit can be calculated accurately, by comparing revenues earned against expenses incurred in the current Reporting Period.
BDAs and relevance
This application of BDAs leads to Relevance in the accounting reports by ensuring that the Income Statement (and, for that matter, the Balance Sheet) includes all information that is useful for decision-making, while exclucling information that is not. Information that would not be useful includes revenue or expenses that were
earned or incurred outside the current Reporting Period.
4 main types of balance day adjustments and the general ledger
The balance day adjustments to be covered in this unit refer mainly to expenses (with stock gain being the obvious exception) and include:
* stock losses and gains
* prepaid expenses
* accrued expenses
* depreciation
These balance day adjustments must be recorded in the General Journal before being posted to the General Ledger accounts.
Prepaid expense
An expense paid in advance but yet to be consumed. Prepaid expenses are current assets as they are a resource controlled by the business as a result of past event (paying for it) that will result in future economic benefits (they will not be consumed until some time in the future) within a period of twelve months.
Accrued expense
An expense that has been incurred but not yet paid. It is a current liability as it is a present obligation of the business (they are obligated to pay the expense) as a result of a past event (incurring the expense) that the settlement of which will result in an outflow of economic benefits sometime within a period of twelve months (paying the expense).
Pre adjustment trial balance
A list of all General Ledger accounts and their balances before balance day adjustments have been made. It is prepared to check that the total debits equates total credits before determining balance day adjustments.
Post adjustment trial balance
a list of all General Ledger accounts and their balances after balance day adjustments have been made. It is prepared to check that even after balance day adjustments have been made that total debits equate total credits.
Another advantage of the post adjustment trial balance
Preparing the Post-adjustment Trial Balance also assists in ensuring that the closing entries and the Income Statement use the correct amounts: the adjusted figures for the amounts incurred rather than the unadjusted figures, which did not account for any balance day adjustments.
Accrual accounting
Calculating profit by comparing revenues earned against expenses incurred in a particular Reporting Period.
Explain the difference between a pre adjusted trial balance and a post adjusted trial balance. Use the below extract to assist you in your explanation.
Stock control dr:54000
Stock gain cr:3200
A Pre Adjusted Trial Balance records the balances of general ledger accounts at the end of the reporting period. A Post Adjusted Trial Balance records general ledger account balances after any correcting and/or adjusting entries. The Post Adjusted Trial Balance contains the values that are used for the Income Statement and Balance Sheet since, because of any corrections and/or adjustments, the values are more relevant to stakeholders. In the above example the Post Adjusted Trial Balance includes both stock control and stock gain thus it must be a Post Adjusted Trial Balance since stock gain is an adjustment. The stock control value of $54 000 includes the impact of the $3 200 stock gain and the stock gain is recognised as a new account which will be reported in the Income Statement.
Identify the correct sequence; adjusting entries then closing entries or closing entries then adjusting entries. Explain.
Correct sequence is adjusting entries then closing entries. Closing entries represent the final value of revenue and expenses in the determination of profit/loss. The expense values may have been subject to an adjusting entry, such as accrued wages, to determine an accurate value for the expense hence adjusting entries come before closing entries. (Note: no adjusting entries for revenue in unit 3)
Identify if the record on the right is a PreAdjusted Trial Balance or a Post Adjusted Trial Balance? Data is for the quarter ending 30th June 2029. Provide 4 separate examples as evidence for your answer.
Photo in favourites
Use the wages of Ace Carpets as an example to explain which comes first, closing or adjusting entries.
The Post Adjusted Trial Balance shows the values of revenues and expenses that will be closed to the Profit and Loss Summary account. Wages is reported at $12 600 which is the wages expense incurred not only the wages paid. We know this because of the accrued wages $500 in the post adjusted Trial Balance. So adjusting entries come before closing entries to ensure the correct value for wages is counted as an expense in the Income Statement for stakeholders.
Investigation shows that on 1st February 2027, the business purchased a new steel office stapler for $50 plus GST. The accountant decided to report this $50 as an office expense in the Income Statement rather than an asset in the Balance Sheet at 30th June 2027. Discuss.
The new steel office stapler would meet the definition of a non current asset because it is a resource, under the control of the business, as a result of past events, that will provide future economic benefits to the business. As such it could be depreciated over its useful life which would be reported as a periodic expense in the Income Statement and work to increase accumulated deprecation and thus decrease its carrying-value in the Balance Sheet. However, because the value of the steel stapler is only $50, the depreciation per reporting period would be of a very low value/scale and thus would not make a material or significant impact on the calculation of profit in the Income Statement. Consequently, the qualitative characteristic of ‘relevance’ could apply as stakeholders would not be disadvantaged in their assessment of the business’s performance by recording and reporting the steel stapler as an expense rather than as a non current asset.
