Lecture Five Flashcards
3What are the financial statements prepared on?
Accrual (matching basis)
What does the accrual basis include
- all income EARNED in a year MUST be included in the SPL regardless of whether the money was received during that year
-all expenses INCURRED IN EARNING THAT REVENUE must be included in the SPL regardless of whether those expenses were actually paid for during that year
when is the accrual required
when expenses have been incurred in the current period but wont be paid for until the following current period - and no bill (invoice) has been received before the period end
When are accruals required
for gas , electricity, telephone, wages, interest
why is gas/electricity/telephones incurred
because they are constantly being used
-need to make sure spl records it
why is interest incurred
interest is also part of it bc u don’t pay a daily interest
How are the accruals reflected on the financial statement SPL
- next to the expense e.g.
Electricity (amount from trial balance + accrual amount)
on the right = the total of both
How are the accruals reflected on the financial statement SPF
Under the current liabilities section
-Accruals Total on the right
what is a prepayment
when some of next periods expenses have been paid in the current period
i.e. business paid for the right to receive the benefit of a certain service in a future period.
Some examples of expenses that may have prepayments
insurance, maintenance, rent
What needs to be done with a prepayment
a calculation that is required to deduce the cost of benefits that are still to come - based on number of months paid in advance
what type of element is a prepayment
an asset
why is prepayment an asset
paid in advance for the future benefits
-because they have monetary value and represent future benefits to a business
what is a prepayment like
a receivable
what is a prompt payment also known as
early settlement
what is a prompt payment
a discount is a discount offered to customers/by suppliers if an invoice is paid quickly
-it is unknown if the discount will actually be taken
what happens with the discounts on the financial statements - when given to customers
-given to customers who pay QUICKLY
-must be DEDUCTED from SALES figure in the STATEMENT OF PROFIT LOSS
what happens with the discounts on the financial statements - when taken by a business
-given from suppliers when businesses pay suppliers QUICKLY
-must be DEDUCTED from PURCHASES from the STATEMENT OF PROFIT LOSS
Carriage means?
delivery costs
What must the cost of inventory include
include ALL costs incurred in bringing the goods to their present location and condition
Carriage inward means
part of the cost of buying inventory -ADDED TO COST OF THE PURCHASES -in the statement of PROFIT OR LOSS
Carriage outwards means
the cost of delivering goods TO CUSTOMERS - NOT part of the ‘cost of goods sold’ - it is shown as OPERATING expense in THE STATEMENT statement of PROFIT AND LOSS (with advertising, electricity, insurance)
what is the main source of a businesses income
revenue from selling the goods or services as part of its normal trading activities
Examples of other sources of minor income
-Royalties received
-licence fees received
-commission received
-rent received
where are the placements of the minor sources of income
after the calculation of gross profit AND BEFOREEEEEEE the operating expenses
What are the adjustments for the closing inventory
Debit increase - Inventory (SFP)
Credit decrease - Cost of goods sold (SPL)
What are the adjustments for the Accruals
Debit increase - Expense (SPL)
Credit increase - accruals (SFP)
What are the adjustments for the depreciation
Debit increase - depreciation expense (SPL)
Credit increase - Accumulated deprecation (SFP)
What are the adjustments for the prepayments
Debit increase - prepayment (SFP)
Credit decrease - expenses (SPL)
