Unit 2 Acc Chapter 15 Review Questions Flashcards
RQ 15.1 // Calculating Profit Q1. Explain what is meant by ‘accural accounting.
Accural accounting is calculating profit by comparing revenues earned against expenses incurred in a particular reporting period.
RQ 15.1 // Calculating ProfitQ2. Explain the purpose of balance day adjustments.
The purpose of balance day adjustments is to ensure that profit can be calculated accurately, by comparing revenues earned against expenses incurred in the current reporting period.
RQ 15.1 // Calculating ProfitQ3. Explain how balance day adjustments ensure Relevance in the accounting reports.
Balance day adjustments apply the Reporting Period principle to ensure Relevance in the accounting reports. That is, by adjusting the figures so that they show revenue earned and expenses incurred in the current reporting period, we are ensuring that the Income Statement (and, for that matter, the Balance Sheet) includes all information that is useful for decision-making, while excluding information that is not (such as revenue or expenses that were earned or incurred outside the current period).
RQ 15.1 // Calculating ProfitQ1. Explain what is meant by ‘accural accounting’
Accural accounting is calculating profit by comparing revenues earned against expenses incurred in a particular reporting period.
RQ 15.1 // Calculating ProfitQ2. Explain the purpose of balance day adjustments.
The purpose of balance day adjustments is to ensure that profit can be calculated accurately, by comparing revenues earned against expenses incurred in the current reporting period.
RQ 15.1 // Calculating ProfitQ3. Explain how balance day adjustments ensure Relevance in the accounting reports.
Balance day adjustments apply the Reporting Period principle to ensure Relevance in the accounting reports. That is, by adjusting the figures so that they show revenue earned and expenses incurred in the current reporting period, we are ensuring that the Income Statement (and, for that matter, the Balance Sheet) includes all information that is useful for decision-making, while excluding information that is not (such as revenue or expenses that were earned or incurred outside the current period).
RQ 15.1 // Calculating ProfitQ4. List the four balance day adjustments that relate to expenses.
• stock losses and gains• prepaid expenses• accrued expenses• depreciation expense.
RQ 15.2 // Prepaid ExpensesQ1. Define the term ‘prepaid expense’.
A prepaid expense is an expense that has been paid but is yet to be consumed.
RQ 15.2 // Prepaid ExpensesQ2. Explain why a prepaid expense is classified as a current asset.
At the time an expense is paid in advance, none of it has been consumed. In fact, it will not be consumed until some time in the future, so it is not a consumption of an economic benefit, but rather a future economic benefit. Therefore, it is a resource controlled by the business of which future economic benefit is expected in the next 12 months.
RQ 15.2 // Prepaid ExpensesQ3. State the effect on the accounting equation of a payment for a prepaid expense.
Assets - Decrease (decrease Bank, increase Prepaid Expense)Liabilities - Decrease (GST payable)Owner’s Equity - No effect
RQ 15.2 // Prepaid ExpensesQ4. Referring to one Accounting Principle, explain which part of a prepaidexpense should be reported as:• an expense• a current asset.
• an expense – the amount incurred (consumed or ‘used up’)• a current asset.– the amount that has not yet been consumed (‘unused’).
RQ 15.2 // Prepaid ExpensesQ5. State the effect on the accounting equation of the balance day adjustment for the consumption of a prepaid expense.
Assets - Decrease (Prepaid Expense)Liabilities - No effectOwner’s Equity - Decrease (increase expense, decrease profit)
RQ 15.3 // Accrued ExpensesQ1. Define the term ‘accrued expense’.
An accrued expense is an expense that has been incurred but not yet paid.
RQ 15.3 // Accrued ExpensesQ2. Explain why an accrued expense is classified as a current liability.
An expense that has been incurred in the current reporting period, but is not yet paid is classified as a current liability because it represents a present obligation, the settlement of which will result in an outflow of economic benefit (when the accrued expense is settled) sometime in the next 12 months.
RQ 15.3 // Accrued ExpensesQ3. State the effect on the accounting equation of the balance day adjustment for an accrued expense.
Assets - No effectLiabilities - Increase (Accrued Expense)Owner’s Equity - Decrease (Increase expense, decrease profit)
