Chapter 6 & 7 : Income and expenses Flashcards
Define the term income
Income refers to the amount earned through the activities of a business
Explain the difference between revenue and other income
Revenue is the amount of money earned from main business activities such as selling goods or providing services while other income is the amount earned from other business activities
Explain the term income receivable
Income receivable refers to income that is earned that is , services have been provided but the amount has not been received
Explain the term income received in advance
Income received in advance refers to income that is receieved, but not yet earned as services has not been provided yet
State when a business should recognise an income received in advancd as an income in the statement of financial performance
Income received in advance is recognised as an income when services has been provided by the business to its cutomer
Define the term expenses
Expenses are costs incurred in the operation of the business to earn income in the same accountng period
Explain the difference between cost of sales and other expenses
cost of sales refer to the cost incurred in buying inventory that was sold while other expenses are other costs incurred during the operation of the business to generate revenue and other income
State and explain the accounting theory which is being applied when accounting for cost of sales
According to thematching theory, the costs incurred to buy the inventory must be matched against sales revenue earned from selling the inventory in the same accounting period to determine gross profit for that period
State and explain the accounting theory which is being applied when accounting for other expenses
According to the matching theory, expenses incurred during the operation of a business to generate income must be matched against income earned in the same period to determine the profit for that period.
Define the term expenses payable
Expenses payable refers to expenses that have been incurred, that is services have been used up, but the amounts have not been paid yet.
Explain the term prepaid expenses
Prepaid expenses refer to expenses that have been paid in advance before services have been used
State when a business should recognise a prepaid expense as an expense in the statement of financial performance
Prepaid expense will be recognised as an expense when the business have used the services
State and explain the accounting theory applied when calculating/adjusting for expenses and income for this year
According to the accrual basis of accounting theory, business activities that have occurred, regardless of whether cash is paid or received, must be recorded in the relevant accounting period.
Hence, income must be recorded in the accounting period it is earned regardless of whether cash is received or not and expenses must be recorded in the period the services have been used regardless of whether they have been paid for or not.
