chapter 18: accrued income, accrued expenses, prepaid expenses and income received in advance

Question 1

explain the need for adjustments

Answer 1

matching/ accrual principle- profits or losses for the period should be calculated as the difference between the revenue and expenses incurred in generating that revenue within a certain period, taking accruals and pre[ayments into account. THEREFORE, outstanding amounts for the current period should be included in the calcualtion of profit for the current period,* WHILSTE,* amounts paid/ received in respect of the following periods shouldn’t be included in profit calculation

prudence principle
- profits should not be overstated(allowed for forseeable losses) and non- current assets shouldn’t be overvalued. THEREFORE, by making adjustments for bad debts, provision for doubtful debts and depreciation ensures that profits and assets aren’t overstated.

Question 2

explain how the closing inventory is valued

Answer 2

valued at net realisable value or lower of cost
net realisable value- amount that can be obtained by selling an asset (inventory ) after deducting expenses incurred to get it in a saleable condition

cost- actual cost price of the inventory plus any additional costs needed to bring it to its present condition and position

Question 3

discuss the importance of the going concer and matching/ accrual principles when preparing the financial statements

Answer 3

going concern- (state principle) when financial statements are prepared on this basis, it becomes easier to acquire loans or attract investors

matching/ accrual principle- (state principle) revenue or expenses relating to other financial periods are not included in the preperation of the current periods financial statements

Question 4

explain the importance of the prudence principle and consitency principles when preparing the financial statements

Answer 4

prudence principle- (state the principle). this enables the financial statements to be a true reflection of the current value of assets of profitability in the business

consistency principle- (state the principle) this makes it easier for the business to compare its performance between years

Question 5

explain accrued income and expenses

Answer 5

accrued income- income earned but not yet received by the end of the financial period
accrued expenses- expenses incurred but not yet paid for by the end of the financial period

Question 6

explain income received in advance and prepaid expenses

Answer 6

income received in advance- income not yet earned but already received for the next financial period
prepaid expenses- expenses not yet incurred but already paid for the next financial period