Chapter 4-7

Question 1

Explain why trial balance is prepared

Answer 1

• To facilitate the preparation of financial statements
• Ensure arithmetic accuracy

Question 2

Explain why trial balance is not a proof of accuracy

Answer 2

There may be errors that do not affect the trial balance.

Question 3

Explain accrual basis of accounting behind the accounting of revenue and other income.

Answer 3

Accrual basis of accounting states that service fee revenue and other income should not be recognised until the services are provided to the customer, regardless of whether payment has been received or not.
Accrual basis of accounting also states that other income earned but not received must be recorded as other income.

Question 4

4 steps of preparing the journal entries for adjustments affecting income and expenses

Answer 4

1. Reversal
2. During the year
3. Adjustment
4. Closing entry

Question 5

Explain accrual basis of accounting behind the accounting of other expenses.

Answer 5

Accrual basis of accounting states that expenses must be recognised in the period the services have been used, regardless of whether they have been paid for or not.

Question 6

Explain matching theory behind the accounting of other expenses.

Answer 6

Matching theory states that expenses incurred during the operation of a business to generate revenue must be matched against revenue earned in the same accounting period to determine the profit for that period.