Equations and Terms Flashcards
What does Capital Expenditure mean?
Capital expenditure are expenses that we incur for acquiring an asset, for improving or replacing an existing fixed asset. (E.g Legal fees incurred on the purchase of a building)
What does Revenue Expenditure mean?
Revenue expenses are short term expenses such as operational costs (e.g repairs)
What does going concern mean?
It means that we assume that the business will continue to trade in the foreseeable future.
What does Prudence mean?
Recording transactions as accurately as possible so not over or under stated. So if stock becomes damaged then the value of the stock must be recorded as soon as it happens.
What does Useful Economic Life mean?
The length of time in which the asset is expected to be used
What does residual value mean?
Scrap value of the asset. So the net amount the business expects to receive at the end of the useful economic life and after disposal costs ( e.g delivery costs to scrap etc.)
How do you work out Carrying value if you have the accumulated and cost?
Cost - accumulated = Carrying Value
How do you work depreciable amount?
Cost of Asset - Residual value = depreciable amount
How is depreciation shown on the P&L?
As a debit as depreciation charge (an expense)
How is depreciation on the SoFP?
As a credit as Accumulated depreciation (reduced the value of the asset)
How do you calculate the annual depreciation charge for straight line?
Original cost of asset / use economic life
How do you calculate annual depreciation if it has residual value at the end of he useful economic life?
Original cost of asset - Residual Value / use economic life
How do you work out the depreciation charge as a percentage of the original cost?
Original cost * X%
How would you list a £6000 asset paying by cheque with £600 depreciation as a double entry?
Dr asset journal ( buying asset with cheque ) £6000
Cr bank journal ( cheque so is a liability) £6000
Dr Depreciation charge (expense so dr to acc dep’n) £600
Cr Accumulated depreciation (reduces value of asset to dep’n charge) £600
How do you work depreciation for diminishing balance? Say it’s 25% a year.
Cost of asset * 25% = depreciation for that year. Dep’n - (new)cost of asset
(New) cost of asset *25% = depreciation for that year. (New) Dep’n - (new) cost of asset
How would you work out depreciation using units of production?
(Normally they give a year 1 and ask if year 1 produced xxx units how much dep’n would be charged if had xxx units of production)
Cost of asset - residual value
Answer to above * Use the year 1 units / units they want answer for.
This will give the depreciation for the the units they want.
When given an invoice to put on a NCA register what do you need to remove?
Need to remove expenses such as 1 year tech support and memory sticks, items that can’t be capitalised and aren’t necessary for the asset.
Also remove VAT if it can reclaimed if it can’t then include gross (e.g vans)
If the depreciation is worked on a monthly basis then how would we calculate it?
£22,000 machine cost, dep’n is straight line at 30% to Feb - May same year
Cost of asset * dep’n percentage = annual depreciation * amount of months/12 months
22,000 * 30% = £6600 * 4/12 = £2200 for 4 months
What is the double entry to remove a disposal?
Dr disposal account
Cr non current asset cost (reducing asset)
After removing a disposal what else do you need to remove and how do you do it by double entry?
Accumulated Depreciation
Dr Accumulated Depreciation
Cr disposal account ( move it with the asset )
If you have sold the disposal then there will be proceeds what is the double entry for this?
Dr bank ( increase with the amount)
Cr disposal account
What is a gain and a loss on a disposal?
These relate to the proceeds you receive on a disposal. So the carrying value of a disposal ( cost - acc. Dep’n at the disposal year). If the carrying value is less than what you receive for selling the disposal then this would be a gain (e.g C.V £1000, but the proceeds are £1500, then have a gain of £500). If the carrying value of the asset is more than what you receive then this is a loss ( e.g carrying value £2000, sold for £1000, then made a £1000 loss.
Do you need to clear or carry forward on a P&L
Clear the balance.
How would you do double entry if it was a part exchange?
Remove disposal as normal.
Dr disposal account
Cr non current asset at cost
Remove acc depreciation
Dr accumulated depreciation
Cr disposal account
Record part exchange value
Dr new non current asset
Cr disposal account
Then show how it was purchased
Dr new non current asset
Cr bank or payables if on credit terms
Then transfer any balance to disposal account to P&L
What does IAS 2 say?
It states that inventory held should be valued at the lower cost or net realisable value ( including delivery costs etc.)
What is the net realisable value?
It’s the amount you expect to sell the asset for minus any further costs e.g selling costs
How do you work out this value of inventory?
Cost = £84000, inventory discontinued item costing £4500, sold for scrap £2400.
£84000 - £4500 + £2400 = £81900 value
Which one do I choose for inventory value?
CHOOSE THE LOWEST VALUE EITHER NET REALISABLE VALUE OR THE COST
NET REALISABLE COST OF INVENTORY - ANY EXPENSES + SCRAP VALUE
OR AMOUNT YOU PAID FOR THE INVENTORY.
What is the double entry for an irrecoverable receivable?
Dr irrecoverable debt expense
Cr receivables ledger control account
Are trade payables debit or credit?
Credit
Are trade receivables credit or debit?
Debit
What is the double entry for a doubtful receivable?
Dr allowance for doubtful receivables adjustment (will affect P&L)
Cr allowance for doubtful receivables (reducing RLCA in SoFP)
What does it mean if there is a £10,000 difference between the non current asset register and the non current asset account in the general ledger. ( non current asset £10,000 more)?
This will be the carrying amount , as you can’t really see the loss or profit only went worked out.
When given a depreciation question and it gives sold value what do you do?
Calculate depreciation up to the year, and then when get to the carrying value of that year deduct from sold proceeds to see if made a loss or profit. If carrying value higher than sold value then made a loss and vice versa for a gain. Remember if it says asset bought at the beginning of year 1, then there can really be depreciation for that year.
When putting the cost of an asset anywhere what should it include?
All that is needed for the asset to work e.g installation costs and the actual cost of asset and set up costs. Training for the asset is an expense not included in the cost of the asset. Preproduction safety testing will also be included in cost as have to have it before they can start.
What is the double entry for making an accrual for an expenditure?
Dr expense account ( increase expense)
Cr accruals ( increase liability)
What is the prepaid expenditure?
Dr prepayments ( current asset)
Cr expenses (reduce expenses)
How do you double entry for accrued income?
Dr accrued income (current asset)
Cr income account (so increasing this)
How do you double entry for prepaid income?
Dr income account (decreasing income)
Cr prepaid income ( as a liability as owe back to the tenant at year end)
Where should the opening balance for a receivable sit?
On the dr side as it’s an asset
How would you double entry for payroll ( include gross pay,paying HMRC,and pension liability)
Dr expense account with gross pay inc employs mic and pension cost for employers
Credit wages
Dr wages control (net pay)
Cr bank with net pay to say you’ve paid staff
Dr wages control
Cr hmrc alll page and nic for both employee and employer
Dr wages control
Cr pension liability for both employer and employees
Dr wages control
Cr other liabilities such as studen loan repayments, season travel tickets, subscriptions
If banks aren’t reconciling what may be the problem?
Unpresented cheques (payment)
Outstanding lodgements (receipts)
Do you add/ less outstanding lodgements and unpresented cheques?
Add outstanding lodgements
Deduct unpresented cheques
(Start with closing balance of bank statement
Add
Less
Balance per general ledger
What method would you do to find timing differences?
Match all and highlight unmatched
Input payments that aren’t on cash book that were on bank
Highlight on cash book that is not on bank
Balance cash book
Put all info on the bank rec (unpresented cheques and outstanding lodgements)
