Chapter 4: Adjusting the accounts and preparing financial statements

Question 1

Depreciation (straight line) formula

Answer 1

Depreciation (straight line) = Cost – salvage variable/ useful life

Question 2

Cash Basis

Answer 2

– Income are recorded when cash is received

– Expenses are recorded when cash is paid

Question 3

Accrual Basis

Answer 3

– Income recognised when the anticipated inflow of economic benefit can be reliably measured
– Expenses when the consumption of benefits can be reliably measured

Question 4

Temporary (Nominal) Accounts

Answer 4

– Income Statement Accounts (expenses and income)

– Reduced to zero balance at the end of each accounting period (closed)

Question 5

Permanent (Real) Accounts

Answer 5

– Balance Sheet Accounts (Assets, liabilities and equity)

–Ending balances carried forward to next accounting period

Question 6

Deferrals (prepayments)

Answer 6

Prepaid expenses
Costs/expenses paid before they are consumed

Unearned revenue
Revenues that are collected or received but not yet earned

Question 7

Accruals (unrecorded)

Answer 7

Accrued expense
Expense incurred but not yet paid

Accrued revenue
Revenue earned but not yet received