Prepaid and Accrued Expenses Flashcards
Why is it important for the business to record balance day adjustments (Assumptions, Full answer)
The going concern assumption stipulates reports are prepared with the assumption that the business will continue to operate, which means assets and liabilities must be recognised as assets will produce an economic benefit and liabilities will need to be settled. The accrual basis dictates that revenues earned should be compared abasing expenses incurred to accurately calculate profit.
Define BDA
A balance day adjustment is a change made to either a revenue or expense account to show the revenues earned and the expenses incurred.
Why is it important for the business to record balance day adjustments for the accounting reports (QC)
BDA’s are made to ensure that the 3 accounting reports contain relevant information that is able to influence decision making, the BDA’s exclude information that is insignificant.
Define prepaid expense and how is it classified
A prepaid expense is a payment that has been made in advance but not yet incurred, which creates a current asset for the business
What is the general journal entry to record the pre payment
Debit: Prepaid Expense and GST Clearing
Credit: Bank
What is the general journal entry to record the consumed expense
Debit: The expense
Credit: Prepaid expense
How is prepaid advertising classified in the reports
CFS: Operating outflow
IS: N/A
BS: Current asset
Define accrued expense and how is it classified
An accrued expense is an expense that has been incurred by the business but not yet paid for, which creates a current liability for the business
What is the general journal entry to record the amount owed
Debit: The expense
Credit: Accrued expense
What is the general journal entry when the accrued amount in paid in the next period along with the expense for that period
Debit: The accrued expense (from last period), GST clearing (accrued only), the expense (for current period)
Credit: Bank
Distinguish between an accrued expense and accounts payable
Accrued expenses are a result of an expense being incurred but not paid for as balance day falls before payment. On the other hand an accounts payable occurs when inventory has been purchased and will be paid for at a later date
What is an adjusted trial balance
A list of all general ledger accounts and their balances after all balance day adjustments have been made to ensure the financial reports will be prepared accurately
