Purpose + Nature of Balance Day Adjustments

Question 1

Accrued Expense Nature

Answer 1

Nature

• Accrued Expense means a expense has been incurred during an accounting period but not yet paid by a business at balance date
• This amount owing is classified as a current liability which must be paid in the next financial year

Question 2

Accrued Income Nature

Answer 2

Nature

• Accrued income means income has been earned during an accounting period but not yet received by a business at balance date
• This amount owing is classified as a current asset which is then received in the next financial year

Question 3

Prepaid Expense Nature

Answer 3

Nature

• Non-physical expenses that have been paid in advance during an accounting period
• These are classified as current assets because their values represent future economic benefit in the form of unexpired services

Question 4

Unearned Income Nature

Answer 4

Nature

• These are other income amounts that have been received in advance during an accounting period
• Classified as current liabilities as the services have not been provided yet and will require some sort of sacrifice of economic benefits in the future

Question 5

Doubtful Debts Nature

Answer 5

Nature

• These are estimated debtors, identified through historical payment patterns, as doubtful in being able to pay their accounts in the new accounting period
• Classified as a financial expense in internal reporting but as an operating expense in external reporting

Question 6

Accrued Expense Purpose

Answer 6

Purpose

• In accrual accounting, all expenses incurred in an accounting period must be reported, regardless of whether the expense has been paid or not by balance date
• Since accrued expense is a liability, it is included in the balance sheet to illustrate the account is still owing
• By adjusting the expense account with accrued amounts added on, the total corrected expense can then be reported in the income statement
  
  • This procedure ultimately prevents overestimating profits and underestimating liabilities

Question 7

Accrued Income Purpose

Answer 7

Purpose

• In accrual accounting, all income incurred in an accounting period must be reported, regardless of whether the income has been paid or not by balance date
• Since accrued income is an asset, it is included in the balance sheet to illustrate the account is still owing
• By adjusting the income account with accrued amounts added on, the total corrected income can then be reported in the income statement
  
  • This procedure ultimately prevents underestimating profits and underestimating current assets

Question 8

Prepaid Expense Purpose

Answer 8

Purpose

• In accrual accounting, the embodied benefits of prepaid expenses will gradually expire as time passes towards balance date
• The expired or used up amounts need to be determined and reported in the income statement as expenses incurred whilst the remaining balances of prepaid accounts are adjusted and reported in the balance sheet
  
  • By adjusting the prepaid expense accounts prevents over estimation of current assets in balance sheet and overestimating profits in the income statement

Question 9

Unearned Income Purpose

Answer 9

Purpose

• In accrual accounting, the embodied obligation of income received in advance will gradually expire as time passes towards balance date
• The amounts earned need to be determined and reported in the income statement as income earned whilst the remaining balances of unearned income are adjusted and reported in the balance sheet
  
  • By adjusting the unearned income accounts prevents over estimation of current liabilities in balance sheet and underestimating profits in the income statement

Question 10

Doubtful Debts Purpose

Answer 10

Purpose

• Helps prevent overestimation of current assets in balance sheet and overestimation profits in the income statement
• This is because it accounts for possible loss of cash flow due to non-paying debtors calculated through an allowance for doubtful debts account

Question 11

4 Rights of Shareholders

Answer 11

• Receive notice of shareholder meeting
• Attend general meetings
• Discuss and vote at general meetings
• Sell and purchase shares
• Participate in company profits (dividends) as determined by directors
• Return on capital upon liquidation if permitted

Question 12

Replaceable Rules definition and 3 matters they cover

Answer 12

• A set of rules outlined by the Corporations Act which can be used to manage a company
• Rules cover matters including:
  
  • The appointment and removal of directors
  • How a shareholder can obtain the right to inspect the accounting records
  • How voting is to be carried out at a meeting of shareholders
  • Who has the authority to approve the payment of a dividend

Question 13

What is a prospectus and 3 things it includes

Answer 13

• A document issued by a public company that invites the public to purchase shares or debentures of that company
• The prospectus includes
  
  • Financial info about company - assets + liabilities, recent + expected future sales
  • The number of shares that are being offered for sale and the offer price
  • Key facts about the directors of the company
  • An application form that investors can complete and return to the company if they wish to apply for shares