Income

Question 1

definition of income

Answer 1

amount earned through activities of a business

Question 2

What is income made up of?

Answer 2

1. Revenue which is earned from the main business activities which is
   i) sales revenue earned from selling goods for a trading business
   ii)service fee revenue earned from providing services for a service business
   (e.g. tuition centre, law firm, photography studio)
2. Other income (e.g. commission income, rental income, interest income, discount received)

Question 3

What are the 2 key accounting concepts for income

Answer 3

• revenue recognition theory
• accrual basis of accounting

Question 4

state revenue recognition theory

Answer 4

revenue recognition theory states that revenue is recognised as earned when goods have been delivered or services have been provided

Question 5

state accrual basis of accounting

Answer 5

the accrual basis of accounting states that
- income is recorded in the financial period that it is earned, regardless of when payment is received
- expenses are recorded in the financial period that they are incurred, regardless of when payment is made

Question 6

double entry account for sales revenue (trading business)

Answer 6

Dr Trade Receivable / Cash at bank (+ asset)
Cr Sales revenue (+ income)

Question 7

double entry account for service fee revenue (service business)

Answer 7

Dr Trade Receivable / Cash at bank (+ asset)
Cr Service Fee Revenue (+ income)

Question 8

double entry for other income (e.g rental income, commission income)

Answer 8

Dr Cash at Bank / Cash at hand (+ asset)
Cr Other income (+ income)

Question 9

the ending balance that is transferred to income summary is recorded in the
____________ section of the statement of financial performance

Answer 9

other income

Question 10

Income received in advance refers to income for which …

Answer 10

payment has been received in the current financial period but will be earned in the next financial period

Question 11

why should income received in advance not be included as income earned in the current financial year?

Answer 11

the business has received cash or cheque but has not earned it yet, as the business has not provided the service to customers yet

according to the accrual basis of accounting, income is recognised as earned when the business provides the service to customers and not when cash or cheque is received

hence, the income received in advance should not be included as income earned in the current financial year

Question 12

what do you do with income received in advance in

statement of financial performance
statement of financial position

Answer 12

performance:
deduct from other income

position:
recorded as a current liability

Question 13

State the 3 steps for income journal

Answer 13

Step 1:
record the amount of income received

step 2:
record the adjustment for income received in advance

step 3:
close the income account to income summary

Question 14

what is income receivable

Answer 14

refers to income that has been earned but the business has not received cash or cheque
the business has already provided the service to the customer and earned the income, but has not received the payment from the customer by the end of the accounting period

Question 15

income receivable
what accounting theory…

Answer 15

according to the accrual basis of accounting, income that is earned but not yet received must be included in income earned in the current financial year.

Question 16

income receivable in
statement of financial performance/position

Answer 16

performance:
add to other income

position:
recorded as a current asset

Question 17

state the three steps for income journal

Answer 17

step 1:
record the amount if income received

step 2:
record the adjustment for income receivable

step 3:
close the income account to income summary

Question 18

what is trade receivable

Answer 18

refer to service fee revenue already earned but the business has not received cash or cheque
the business has already provided the service to the customer and earned the income, but has not received the payment from the customer by the end of the accounting period

Question 19

what theory supports trade receivables

Answer 19

based on the accrual basis of accounting, service fee revenue that is earned but not received must be included in service fee revenue earned in the current financial year

Question 20

trade receivable in statement if financial performance/position

Answer 20

performance:
add to service fee revenue

position:
recorded as a trade receivable in current assets