Chapter 3 Flashcards
Profit
increase of wealth arising through business operations
Revenue
inflow of assets or decrease in liabilities arising from trading operations
What can revenue be recognised as
the amount a business is entitled for providing good / services once control of goods is passed to the customer
Four types of revenue
- sales of goods
- fees for services
- subscriptions
- interest received
Expenses
measure of the outflow of assets or increase in liabilities incurred whilst generating revenue
Cost of sales
the cost of buying or making the goods sold during a period
Four types of expenses
- cost of sales
- salaries and wages
- rent
- heat and light
Calculation for profit (or loss) for period
total revenue - total expenses
Gross profit
the amount remaining after cost of sales has been deducted from trading revenue
Equation for gross profit
revenue - COGS
Operating profit
profit after operating expenses have been deducted from revenues from operation
Equation for operating profit
gross profit - operating expenses
Profit for the period
any non operating (interest received) income less interest payable, added to equity figure
Equation for cost of sales
opening inventory + purchases - closing inventory
Income statement layout (8)
- sales revenue
- cost of sales
- gross profit
- operating expenses
- operating profit
- non operating expenses
- non operating income
- profit for the period
When is revenue recognised
- physical possession passed to customer
- business has the right to demand payment for goods / service
- customer has accepted goods / service
- legal title passed to customer
- risks and rewards of ownership passed to customer
When a good / service is transferred t a customer over time
the total revenue must be recognised over time
Matching convention
expenses should be matched to the revenue that they helped to generate
Accrued expenses
an expense that is outstanding at the end of a reporting period
Prepaid expense
an expense paid in advance at the end of the reporting period
Materiality convention
when an amount involved is immaterial we should only consider what is expedient
Acccruals convention
profit is the excess of revenue over expenses not the excess of cash receipts over cash payments
Depreciaton
a measure of the portion of the cost of a NCA that has been depleted in generating revenue
Amortisation
a measure of the portion of the cost of an intangible non current asset that had been depleted in generating revenue
Four factors to calculate depreciation
- cost or fair value of asset
- useful life of asset
- residual value of asset
- depreciation method
Residual value
the amount that a NCA is expected to be sold for
Calculation for the total amount to be depreciated
fair value - residual value
Straight line method
the amount depreciates evenly over the useful life of the asset
Carrying amount
difference between the cost of NCA and accumulated depreciation
Reducing balance method
calculating depreciation that applies a fixed percentage rate of depreciation to carrying amount
First in first out
inventories acquired earliest are used first
Last in first out
most recently acquired inventories are used first
Weighted average cost
inventories acquired lose their separate identity ad go into a pool
Consistency convention
when a method of accounting is selected to deal with a transaction, this should be applied over time
Bad debt
an amount owed to a business that is considered to be irrecoverable
What must happen to bad debt
bad debt must be written off
