Chapter 3 (Week 2)

Question 1

Time period assumption

Answer 1

Accountants divide the economic life of a business into artificial time periods

Question 2

Accrual basis accounting

Answer 2

Companies record transactions in the period in which they occur
- Focused on when when things happen, not when cash changes hands

Question 3

Cash basis accounting

Answer 3

Companies record transactions when cash is received or paid

Question 4

Revenue recognition principle

Answer 4

Requires that companies recognise revenue in the accounting period in which the performance obligation is satisfied
- A company satisfies its performance obligation by performing a service or providing a good to a customer

Question 5

Expense recognition principle

Answer 5

Requires that companies recognise expenses in the period in which they make efforts to generate revenues
“Expense follows revenues”

Question 6

Paying on account

Answer 6

Get the service/good and pay in the future
- When you owe money - liabilities go up (you promised to pay)- credit liabilities
- When you pay on account - liabilities go down ( you are paying it off) - debit liabilities

Question 7

Adjusting entries

Answer 7

Ensure that the revenue recognition and expense recognition principles are followed a company prepares financial statements

Question 8

Deferrals or prepayment

Answer 8

Expenses or revenues that are recognised at a date later than the point when cash was originally exchanged → Occur when goods/services have been paid in advance

Cash happens first, recognition comes later (Delayed Dollars)

Question 9

Accruals

Answer 9

Expenses or revenues that are recognised at an earlier date than the point when cash will be exchange in the future → occur when goods/services need to be paid in the future but the revenue is recognised first

Recognition happens first, cash comes later (Accumulated Actions)

Question 10

Prepaid expenses

Answer 10

Deferrals
Expenses paid in cash before they are used/consumed

1. Debit prepaid expense and credit cash

When good is consumed
2. Debit expense annd credit prepaid expense

Pay for rent for your bakery before you actually use it

Question 11

Unearned revenues

Answer 11

Deferrals
Cash received before services are performed

1. Debit cash and credit unearned revenues (liab)

When service will be provided
2. Debit unearned revenue (liab) and credit revenue

You get paid before providing the bread

Question 12

Accrued revenues

Answer 12

Accruals
Revenues for services performed but not yet received in cash or recorded at the stated date

1. Debit receivable and credit Revenue

When service will be provided
2. Debit cash and receivable

You have sold your bread but they sill have to pay you

Question 13

Accrued expenses

Answer 13

Accrual
Expenses incurred but not yet paid in cash/recorded at the stated date

1. Debit expense and credit payable (liability)

When service will be paid
2. Debit payable (liability) and credit cash

You have used up the flour to make your bread but have yet to pay your flour suppliers

Question 14

Depreciation

Answer 14

The process of allocating the cost of an asset to expense over its useful life- it is an allocation concept not a valuation concept
- It is recorded in the contra asset account

Depreciation expense formula = (Cost - Salvage Value) / Useful life

Question 15

Going concern assumption

Answer 15

States that the business will remain in operation for the foreseeable future