Lecture 5 Flashcards
depreciation = ?
breaks up the up-front cost of a long-term asset over its useful life
what type of account is depreciation?
expense
what are the 2 important dates for recording depreciation?
asset purchase date
adjustment date
what is straight-line depreciation?
allocation of a fixed asset’s value over time in equal amounts
how do you record depreciation?
initial purchase (debit fixed asset, credit cash)
adjustment (debit depreciation expense, credit accumulated depreciation)
accumulated depreciation = ?
a contra-asset account that accumulates depreciation expenses over the asset’s useful life
contra-account = ?
have an opposite balance of the typical account
e.g., contra-asset account has a credit balance
what is a businesses main aim?
to maximise profits
what does accounting for profit help businesses do?
plan
obtain loans
show success
accurately calculate tax liability
gross profit = ?
sales - cost of sales
the excess of sales revenue over the cost of sales in the period
net profit = ?
revenue - expenses
the excess of operating profit over the operating expenses in the period
what does ‘on time’ mean?
paid by credit
trader = ?
someone mainly concerned with buying & selling goods
what do traders identify?
revenue & expenses
what two accounts make up the income statement?
trading account
profit & loss account
what is the purpose of the two accounts?
trading account = calculate gross profit
profit & loss account = calculate net profit
how do you account for COGS?
debit COGS, credit inventory
how do you calculate the trading account?
the sales & purchases account balances are transferred to the trading account to close the accounts for the period
debit sales, credit trading account
debit trading account, credit purchases
after all accounts have been balanced off with the trading account, what do you do?
close off the trading account by debiting closing inventory and crediting trading account
what is the format of a trading account?
revenue
-cost of sales (opening stock + purchases - closing stock)
= gross profit
what does the profit & loss account show?
revenue - expenses
trading account & profit & loss account format = ?
sales
- cost of sales
= gross profit
- expenses
= net profit
income statement = ?
a summary of the revenue and expenses for a specific period of time
matching concept = ?
concept applied by matching expenses with the revenues they generated, only during the period that those revenues were generated
when is revenue deemed to have been earned?
when the firm have completed a substantial portion of the production/sales effort
when the risks of ownership have been shifted to the customer
accrued expenses = ?
when the expenses for the period exceed the cash paid during the period and is carried over to the next period
what element of accrued expenses are shown on the income statement?
amount paid + amount outstanding is shown in the income statement
what element of accrued expenses are shown on the balance sheet?
the accrued expense amount outstanding is shown on the balance sheet as a current liability
how are accrued expenses portrayed on the SOCF?
the amount paid will be reduced from cash outflows in the cash flow statement
prepaid expenses = ?
when amount paid exceeds the expense required for the period
how are prepaid expenses portrayed on the income statement?
total amount paid - amount paid in advance at the end of the period is shown on the income statement
how are prepaid expenses portrayed on the balance sheet?
amount paid in advance is represented as a current asset
how are prepaid expenses portrayed on the SOCF?
amount prepaid is reduced from cash outflows in the socf
what factors affect depreciation calculation?
cost of asset
estimated useful life
residual value
depreciation method