Chapter 13 : Long-term Borrowings Flashcards
Explain the term long-term borrowings
Long-term borrowings are loans that a business borrows from the bank which has a repayment period of more than one financial year.
Explain the term current portion of long-term borrowings
Current portion of long-term borrowings refers to the portion of the principle that is to be repaid within the next financial year
Explain the term bank overdraft
A bank overdraft occurs when the business withdraws more than what is has deposited in the bank account, up to the limit the business and bank have agreed upon.
Explain why a business obtains loans
A business may borrow money as it requires additional funds for its operations such as to expand the business, fund day to day operation, to buy non-current assets and to fund other business plans
State the differences between a bank loan and bank overdraft
- A bank loan occurs when the business borrows a fixed amount of money from the bank and the cash is transferred to the bank account while a bank overdraft occurs when the business withdraws more than what is has deposited in the bank account, up to the limit which the bank and business have agreed upon and no cash is transferred.
- A bank loan is repaid in regular cash payments in equal instalments over the loan period or a one-time lump sum payment at the end of the loan period. On the other hand, a bank overdraft is repaid when the business deposits cash into the bank account within this year to reduce the overdraft
- A bank loan is settled within a fixed period, which is usually more than one financial year. It is presented as long-term borrowings under non-current liabilities in the statement of financial position. On the other hand, a bank overdraft is settled within one financial year. It is presented as bank overdraft under current liabilities in the statement of financial position.
State and explain the accounting theory which is being applied when accounting for interest expense
According to the matching theory, interest expense incurred must be matched against the income earned from using the loan to operate business in the sane accounting period to determine profit for that period
Name and explain the accounting theory applied by a business when accounting for interest expense incurred but not yet paid
According to the accrual basis of accounting theory, interest expense must be recognized in the financial period when incurred, regardless of whether it has been paid or not.
Hence, interest expense incurred but not yet paid must be included in the current period’s interest expense even when payment has not been made and the amount owing is to be recognized as a current liability.