Chapter 13 LTB Flashcards
Define the term long term borrowings
-Long-term borrowings are loans that a business borrows from a bank which has a repayment period of more than one financial year.
Define the term current portion of long-term borrowings
-Current portion of long-term borrowings refers to the portion of the principal sum that is to be repaid within the next financial year.
Define the term bank overdraft
-Bank overdraft occurs when the business withdraws more than what it has deposited in the bank account, up to the limit which the business and the bank have agreed upon
State the differences between a bank loan and a bank overdraft
-Bank loan occurs when the business borrows a fixed amount of money and the cash is transferred to its bank account while a bank overdraft occurs when the business withdraws more than what it has deposited in the bank account, up to the limit which the business and the bank have agreed upon and no cash is transferred.
-A bank loan is repaid when the business makes regular cash payments in equal instalments or a one-time lump sum payment at the end of the loan period while a bank overdraft is repaid when the business deposits cash into the bank account within the 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 while a bank overdraft is settled within one financial year. It is presented as bank overdraft under the current liabilities in the statement of financial position.
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, to fund day to day operation, to buy non-current asset and to fund other business plans.
State and explain the accounting theory which is applied when accounting for interest expense
-According to the matching theory, the interest expense incurred must be matched against the income earned from using the loan to operate business in the same accounting period to determine the 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 incurred must be recognised in the financial period , regardless of whether or not it has been paid.
Hence, interest expense incurred but not paid(interest payable) must be included as the current period’s interest expense even when payment has not been made and the amount owing is to be recognised as a current liability.
