Chapter 6 and 7 : Income and expenses

Question 1

Explain prepaid expense, expense payable, income received in advance and income receivable.

Answer 1

Prepaid expense is an expense paid in advance and not used. (CA)
Expense payable is an expense used but not paid. (CL)
Income received in advance refers to income received but not earned. (CL)
Income receivable refers to income earned but not received. (CA)

Question 2

Name and explain the accounting theories applied for making prepayment and expense payable adjustment.

Answer 2

Accrual basis of accounting theory states that business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period.

Matching theory states that income earned must be matched against expenses used in the same accounting year so that profit will be accurate.

Question 3

Name the explain accounting theory applied to account for income earned but not received.

Answer 3

Revenue recognition theory states that income is earned when goods is delivered or services have been provided.

Question 4

Explain effect on asset and profit if prepaid expenses are not adjusted at the end of year.

Answer 4

If prepaid expense is not adjusted, CA will be understated and profit will be understated.

Question 5

Explain effect on asset, liability and profit if income received in advance is not adjusted at end of accounting year.

Answer 5

If income received in advance is not adjusted, CL will be understated and profit will be overstated.

Question 6

Explain effect on asset and profit if income receivable is not adjusted at end of accounting year.

Answer 6

If income receivable is not adjusted, CA will understated and profit will be understated.

Question 7

Explain effect on asset and profit if expense payable is not adjusted at the end of financial year.

Answer 7

If expense payable is not adjusted, CL will be understated and profit will be overstated.