Pre-3/4 - Lesson 1 - Prepaid Expenses Flashcards
When is the “balance day”?
The balance day is the final day in a reporting period.
T/f - Balance Day Adjustments or BDAs are changes (adjustments) made to a revenue or expense account on the balance day so that revenue accounts show revenues earned expense accounts show expenses incurred in a particular Period.
True
Which AA’s and QC’s are upheld by conducting BDA’s?
Going concern
Period assumption
Accrual basis
Four types of BDA’s are…
Inventory loss / gain
Depreciation
Prepaid expenses
Accrued expenses
These BDAs must be made ______________ the final reports (Balance Sheet, Income Statement, Cash Flow Statement) are prepared.
These BDAs must be made before the final reports (Balance Sheet, Income Statement, Cash Flow Statement) are prepared.
Prepaid expenses are…
…are expenses that are paid in advance, before they are used or consumed.
T/f - At the time of payment the amount is not an expense, it will be classified and recorded as an Current Asset.
True - It only becomes an expense when the amount is actually consumed/incurred so that there is a decrease in an asset that reduces owner’s equity (except for Drawings)
Examples of prepaid expenses include…
Prepaid rent
Prepaid advertising
Prepaid insurance
Malcolm’s Cheesecakes paid $3600 (plus $360 GST) for six month rent of the office on 1st May 2024 (Chq. 128). Malcolm’s Cheesecakes reports annually on 30 June each year.
How much was consumed by 30th June?
$1200 - Consumed (therefore an expense)
$2400 - Remains (therefore a current asset)
Explain the effect on the accounting equation at the time of the transaction on 1st May 2024.
Assets:
Liabilities:
Owner’s Equity:
A; Prepaid Rent increase by $3600, Bank will decrease by $3960 = overall decrease by $360.
L: GST Payable decrease by $360, overall decrease by $360
OE: No effect
