CHAPTER 16 Flashcards
3 revenue balance day adjustments
Stock gain
Prepaid revenue
Accrued revenue
Prepaid revenue
A revenue received but yet to be earned. In cases such as these, the firm would have received the cash, but because it has not supplied any goods (or services) to the customer, it has not earned any revenue.
When would prepaid revenues occur
This would be the case if a firm accepted subscriptions, such as to a magazine; rented out extra space in its warehouse; offered lay-“by facilities; or accepted cash as a deposit to secure a sale.
Classify a prepaid revenue
Where revenue is prepaid, the good/service is owed to the customer, so the firm has an obligation to provide them sometime in the future. Thus, prepaid revenue is not revenue at all, but rather a current liability: a present obligation that is expected to result in an outflow of economic benefits when the good/service is supplied sometime in the next 12 months.
Accrued revenue
A revenue that has been earned but not yet received. For example, interest on a term deposit may have been earned, but is not due to be received until next month. Other items such as royalties and commissions may only be received after they have been earned. Because this amount has been earned in the current Reporting Period, it must be recognised as revenue.
Classifying accrued revenue
The amount owing should also be recorded as a current asset, as some time in the future, the cash will be received. The amount owed to us for revenue we have already earned is called accrued revenue.
Accrued revenue vs debtors
Both current assets. The revenue is earned before the cash is received, so they represent a resource controlled by the entity (the debt), which will bring a future economic benefit in the next 12 months (cash).
However, If the customer has the goods and the invoice, then a credit sale has occurred, and a debtor should be recognised. However, if the revenue relates to a transaction other than Sales, and the customer has not been sent the invoice, then accrued revenue has been earned. As such, accrued revenue will be verified by a memo rather than an invoice.
Distuinguish between trade creditors and sundry creditors
Trade creditors refers to suppliers that are owed due to stock purchases on credit. Total data relating to these creditors is recorded in the Creditors Control account in the General Ledger and individual trade creditor accounts appear in the Creditors Subsidiary Ledger. A sundry creditor refers to a creditor arising from supplying goods or services other than
trading stock. An example would be supplying a non current asset on credit. Sundry cred-itor accounts appear in the General Ledger and do not appear in the Creditors Subsidiary Ledger.
Distinguish between depreciation and accumulated depreciation.
Depreciation is an expense and represents the decrease in the value of the NCA over the reporting period (or allocation of the depreciable cost for the reporting period). Accumulated depreciation is a negative NCA and represents the summation of depreciation expense to that point in time.
Straight line depreciation is just one of many different methods of calculating depreciation. Is straight-line depreciation an appropriate method to use for the Shelving Unit? Explain.
Straight line depreciation means the depreciation value per reporting period is the same. This method assumes that the NCA contributes to revenue evenly each reporting period and the depreciation expense matches that contribution to revenue. Shelving Units probably would contribute to revenue evenly each reporting period hence straight line depreciation is an appropriate depreciation method.
Define the historical cost of a non current asset giving examples.
The historical cost of the non current asset (NCA) plus any additional cost to get the NCA into a position and condition ready for productive use or revenue generation. Additional costs include freight inwards, modifications and installation. Excludes GST.
Explain how you would classify the Disposal of Presentation Screen ledger account?
A ‘collection’ or ‘calculation’ account. It exists to facilitate the double entry necessary to dispose of the non current asset. (It is not reported in any of the reports.)
