Topic 6: Adjustments to income and expenses

Question 1

What are End of Period adjustments?

Answer 1

End of Period adjustments are adjustments made to update certain accounts on the last day of an accounting period to ensure that all income and expenses and all assets and liabilities are accounted for

Question 2

What are the concepts underlying end of period adjustments?

Answer 2

a) Matching Principle
b) Accrual Concept

Question 3

What is the Matching Principle?

Answer 3

To determine the profit of an accounting period, the income recognised in that accounting period has to be matched with all the expenses incurred to earn that income

Question 4

What is the Accrual concept?

Answer 4

Under the accrual basis of accounting, income is recognised in the period earned, REGARDLESS OF WHETHER THE CASH HAS BEEN RECEIVED. Income is usually recognised at the point when goods are delivered (title or ownership of goods have passed to the customer) or the completion of services.

Expenses are recognised when assets and services are used up REGARDLESS OF WHETHER THEY HAVE BEEN PAID FOR.

Question 5

How do you ensure accurate matching of expenses and income under the accrual basis?

Answer 5

It is necessary to include all revenue earned and but not received and expenses incurred but not paid.

These include adjustments for:
-Income receivable or accrued income
-Expenses payable or accrued expenses

Question 6

What is Income receivable/accrued income?

Answer 6

Income earned but which have yet to be received on the last day of the accounting period.

Such income receivable must be included in the computation of the current period’s profit as it is earned in the current period.

Question 7

Note:
Income receivable or accrued income is a current asset as the related cash will be received in the following accounting period

This amount will be shown as a trade/other receivable in the balance sheet of the current accounting period

Question 8

What are Expenses Payable/Accrued Expenses?

Answer 8

These are expenses owing, that is, expenses already incurred in the current accounting period but have not been paid for on the last day of the accounting period.

Question 9

Note:
Expenses payable or accrued expenses are CURRENT LIABILITIES as they have to be repaid within the next accounting period.

This amount will be shown as a trade/other payable in the balance sheet of the current accounting period

Question 10

What are arrears?

Answer 10

money that is owed that should have been paid earlier

Question 11

What is apportion?

Answer 11

-divide up and share out
-assign

Question 12

What is Unearned Income/Income Received in Advance

Answer 12

This is income received in the current period for services performed in the next period, i.e. income received but not earned

Income received in advance aka unearned income should be excluded from the computation of current period’s profit as it is earned only in the next period once the services are performed

Question 13

Note:
Income received in advance or unearned income is classified as a current liability as the business owes the customer a service

Question 14

What is Sublets?

Answer 14

lease a property to a subtenant?

Question 15

What is a Subtenant?

Answer 15

a person who leases property from a tenant

Question 16

What is Sublease?

Answer 16

another term for sublet

Question 17

What are Prepaid Expenses?

Answer 17

These are expenses paid in advance.

They have been paid in the CURRENT PERIOD but will ONLY BENEFIT OR BE USED BY THE BUSINESS IN THE NEXT ACCOUNTING PERIOD.

Therefore, they should be excluded from the computation of current period’s profit

Prepaid expenses aka prepayments

Question 18

Note:
Prepaid expenses are classified as current assets in the balance sheet as they represent resources of the business, which will be consumed in the next accounting period

Question 19

What are Supplies or Materials?

Answer 19

Supplies or Materials are items consumed in the course of running the business but ARE NOT MEANT FOR RESALE

Hence, in determining the profit of the current period, only the ACTUAL AMOUNTS USED SHOULD BE INCLUDED AS EXPENSE to ENSURE PROPER MATCHING OF EXPENSES WITH INCOME EARNED. The remaining UNUSED SUPPLIES will be SHOWN AS A CURRENT ASSET IN THE BALANCE SHEET of the current accounting period