Week 3 Flashcards
What is the CASH BASIS formula for profit?
Profit = Cash Inflows from Income - Cash Outflows from Expenses
What is the ACCRUAL BASIS formula for profit?
Profit = Income Earned - Expenses Incurred
What is the accounting entity assumption?
The assumption that a business entity is separate and distinct from its owners and from other business entities.
What is the accrual accounting assumption?
An attempts to match income to the period in which it is earned and expenses to the period in which they are incurred.
What is the accounting period assumption?
The life of the business is broken up into equal accounting periods.
What is the going concern assumption?
In the absence of evidence to the contrary, the entity is assumed to have an indefinite life.
What are deferrals?
Deferrals include items that have been prepaid.
i.e. Prepaid Expenses
What are accruals?
- Accruals include expenses incurred but not yet paid 2. Income earned not received.
Adjustment entries will always
Adjustment entries will always involve an Income Statement item and a Balance Sheet item.
Adjustment entries will never
Adjustment entries never
- adjust the cash account.
- adjust Accounts Receivable or Accounts Payable as these are control accounts (in this Unit).
Types of adjusting entries?
– Prepaid Expenses (a)
– Unearned Income (b)
– Supplies used (c)
– Depreciation (d)
What is depreciation?
Depreciation is an accounting method that is used
to allocate the historic cost of the asset over the
accounting periods in which it is used.
What is accumulated depreciation? Account type.
Accumulated depreciation is a Contra Asset account.
The purpose of depreciation is (and what it is not).
The purpose of depreciation is cost allocation, not
market valuation.
What is the definition of HIstoric Cost?
- Assets are recorded at the amount of cash or equivalents used to acquire them.
- Liabilities are recorded at the amount of cash or
equivalents that will need to be paid out to satisfy them.
When are events/transactions recognised under accrual basis accounting?
Under the accrual basis assumption, transactions
and events are recognised in the accounting period
they occur and not when cash is received or paid.
Per accrual basis accounting, income is recognised when
Income = recognised when earned
Per accrual basis accounting, expenses are recognised when
Expenses = recognised when incurred
Per accrual basis accounting, expenses are recognised when
Expenses = recognised when incurred
The accounting period assumption is the assumption that
The life of a business entity can be divided into arbitrary equal time intervals for reporting periods
The going concern assumption is the assumption that
In the absence of evidence to the contrary, a business will continue in the future and use its assets in operations rather than sell them.
The accounting entity assumption is the assumption that
A business entity is separate and distinct from its owners and from other business entities
What are deferrals?
Items where the cash has been received/paid, but the
income/expense has not yet been recognised.
Cash NOW – Recognition LATER
What are accruals?
Items in which the income/expense has been recognised, but the cash has not yet been received/paid.
Recognition NOW – Cash LATER
What is depreciation?
Decrease in value of an asset (common English usage
of the term)
Assets are recorded at their
Historic Cost
