week 4 Flashcards
what is the income statement
records the entity’s income and expenses
calculates if the entity has made a profit or loss
provides a summary of trading activities
allows users to evaluate financial performance
what is income
increase in economic benefits during the accounting period in the form of inflows or the enhancements of assets or decreases of liabilities that cause increase in equity
what is revenue
income earned in the period from normal trading activities
what are gains
changes in asset values recorded in the accounts
what is gross profit
profit after subtracting cost of sales
what is operating profit
profit arising from the business’ operations
what are expenses
yearly running costs, used up in the period being reported on
what is profit or loss
total income made by the entity in the period - total expenses incurred
how do you calculate cost of sales
opening inventory + purchases of inventory - closing inventory
what is cost of sales
costs directly incurred from selling goods
purchases of inventory need to adjust purchase return and transport inwards
- purchase return
+ carriage inwards
what accounting concepts are relevant to the I/S
recognition - revenue is recognised by the entity when the sale has been carried out
realisation - the entity has received cash for the sale/service or if it has received other assets
accruals concept - revenue and expenses must be recorded in the period where they arose
what are the rules for revenue recognition
revenue is recognised when performance obligations in the contract are performed
there is an increase in cash or trade recievables as a result of the transaction
what is capital expenditure
associated with items that appear on the balance sheet as an asset and are used for more than one accounting period
what is revenue expenditure
short term items that appear in the income statement as an expense
what are the two main types of expense
product costs and period costs
what are product costs
costs that can be directly matched with revenues
related to the production of a product or service
included in cost of sales
may be carried forward to be matched with the revenues they generated
what are period costs
costs/expenses which generate revenue but are not directly traceable to the sale of a specific item
associated with the passage of time
expensed in the period in which they occur
what are administration costs
salaries of accounting staff, office overheads, heat, light etc
what are distribution/selling costs
salesmen salaries, credit control staff salaries, advertising and marketing etc
what are finance costs
loan interest, bank charges, discounts etc
what are accrued expenses (accruals)
payables for services received that have not been paid for at the end of the accounting year
they arise when expenses are paid after use
it is a liability on the balance sheet
what are prepaid expenses (prepayments)
recievables in services that have been paid for but not received at the end of the accounting year
arise where expenses of the services are paid for in advance
an asset on the balance sheet
how do you calculate accrued expenses
CB accruals + payment - OB accruals
how do you calculate prepayments
OB prepayments + payments - CB prepayments
why do you adjust the trial balance for accruals and prepayments
these changes are made after checking if all the expenses are correct at the year end
the same type of expenses often have accruals or prepayments each year
to prepare financial statements, start with trial balance and adjust if necessary
