Week 4

Question 1

Income

Answer 1

Increases in economic benefits during the period in the form of inflows or enhancements of assets or decreases in liabilities. Results in increases in equity. Not contributions by the owners

income = revenue + gains

Question 2

Expense

Answer 2

Decreases in economic benefits during the period in the form of outflows or depletion’s of assets or incurrences of liabilities. Result in decreases in equity. Not distributions to the owners.

Expenses are recognised in the period in which the consumption of costs can be measured

Question 3

Current assets vs current liabilities

Answer 3

Current assets will be used with a single operating cycle (usually 12 months.)

Current liabilities paid off within a single operating cycle

Question 4

Non-current assets vs non-current liabilities

Answer 4

Non current assets will not be used up within a single operating cycle (usually 12 months)

Non current liabilities will not be paid off within a single operating cycle

Question 5

Measurement of profit

Answer 5

Cash basis

Accrual basis

Question 6

Cash basis

Answer 6

Income is recorded when cash is received

Expenses are recorded when cash is paid

Question 7

Accrual basis

Answer 7

Income recognised when the anticipated inflow of economic benefit can be reliably measured

Expenses recognised when the consumption of benefits can be reliably measured

Question 8

Accrual and cash bases accounting

Answer 8

The main difference between the accrual and cash bases of accounting is the timing of when revenues and expenses are recorded. The generally accepted accounting principles require the accrual basis, income statements report accrual-based profit or loss. Cash basis information is also useful in understanding the financial condition of a company. A company that generates accrual income but never generates cash is a company that will soon fail

Question 9

Cash basis

Record revenue when

Record expenses when

Answer 9

Cash is received

Cash is paid

Question 10

Accrual basis

Record revenue when

Record expenses when

Answer 10

Revenue is earned

Expense is incurred

Question 11

The need for adjusting journal entries

Answer 11

In many cases the period in which cash is paid or received does not coincide with period in which expense and income are recognised

Therefore, some accounts must be adjusted on the last day of the accoutring period to correctly recognise income and expenses not reflected in cash receipts or payments.

Question 12

Classifcation of adjusting entires

Answer 12

Deferrals (prepayments)

Accruals

Question 13

Deferrals

Answer 13

Prepaid expense

Unearned revenue

Question 14

Accruals

Answer 14

Accrued expense

Accrued revenue

Question 15

Prepaid expense

Answer 15

Costs/expenses paid before they are consumed

Question 16

Unearned revenue

Answer 16

Revenues that are collected or received but not yet earned

Question 17

Accrued expense

Answer 17

Expenses incurred but not yet paid & unrecorded

Question 18

Accrued revenue

Answer 18

Revenue earned but not yet received & unrecorded

Question 19

Classification of adjusting entires

Answer 19

When a company receives cash before it provides the service, it has a deferred revenue (unearned revenue)

When a company pays for a resource before it uses or consumes it, the company has a deferred expense (prepaid)

When a company earned revenue but not yet received in cash or entered in the records, it has an accrued revenue.

When a company consumed service but not yet paid in cash or entered in the records, it has an accrued expense

Question 20

The rule of adjustment entires

Answer 20

Attempting to account for the timing difference between receipt/payment of cash and recognition of income/expense.

One side of the entry affects and income statement account (that is revenue or expense)

The other side of the entry affects an account reported in the balance sheet (That is asset or liability)

Cash is never adjusted

Question 21

Depreciation

Answer 21

Allocation of the historic cost of an asset (less any residual) over the useful life of that asset

Question 22

Adjusted trial balance

Answer 22

Same accounting process applied

Unadjusted trial balance used as starting point

Adjusting entires are posted to the general ledger

An adjusted trial balance can then be prepared

Debits must still equal credits

Adjusting entires always affect and income statement and a balance sheet account