Week 4 - Income Statement and Adjusting Entries Flashcards
What is the matching principle
Expenses are matched to revenue they might help generate
What is conservatism or prudence principle
Recognise anticipated losses immediately, recognise anticipated gains only when they arise
Income statement format
Sales COGS Gross Profit Operating Expenses Operating Income Interest Gains/Expenses Pre-tax income Taxes Net income
What is an accrued expense
costs for the current period which have not been recorded as an expense yet but is recorded on income statement as accrued expense
What is a prepaid expense
Expense recorded but related to consumption in a future accounting period
I rent an office paying quarterly, 6000 per quarter, starting March 1 2018. I pay 6000 on Dec 1 2018 covering until feb 28 2019. what is my IS and BS for 2018.
Rent expense = 3 x 6000 = 18000 December rent = 1/3 x 6000 = 2000 prepaid expense = 2/3 x 6000 = 4k cash out = 24000 prepaaid expense account = 4000 rent expense = 20000
What is deferred revenue
When customer pays but you havent done the service or good yet = liability
fiscal year = calendar year
for december, employees must be paid 25k
salary is paid jan 5 next year
what is entry on dec 31
Dec 31: Dr salary expense, Cr accrued expense
Jan 5: Dr accrued expense,
Cr Cash
How is depreciation recorded
as an expense related to how long it was used - so if i buy a factory halfway through period, end of period the depreciation expense is half of yearly depreciation
How is depreciation logged on BS
Gross asset
accumulated dep
Net asset
cost of sales formula
opening inventory + purchases = goods available
goods available-closing inventory = COGS
how does the prudence principle work if there is an inventory write down
you use the lower value out of the carrying amount (initial cost) and the net realisable value (est. selling price minus costs involved in selling and distributing)
What is the doubly entry for inventory write down
Dr write down (IS) Cr Inventory (BS)
Cost of inventory at end = 1100 including 150 for mens clothes which firm then decides to sell at 30% of their cost (writing down by 70%)
Beginning inventory = 1050
Purchases = 6520
What is COGS
Beginning 1050 + purchases 6520 = 7570
- closing inventory (1100-0.7x150=995)
COGS = 7570-995 = 6575
when would you need to adjust for bad and doubtful debt
iif customers do not pay the receivables
Bad debt (irrecoverable debt) what happens and double entry
write off (Dr bad debt write off (IS), Cr accounts receivable (BS)) so expense on IS of the write off, then minus the value from accounts receivable from BS directly (don't add a section for less bad debt)
what does a firm do when there is doubtful debt
they create a provision against them
what is double entry when firm decides some remaining debts are doubtful
Dr doubtful debt expense (IS) = expense on IS
Cr Provision for doubtful debt (BS) = this is subtracted from accounts receivable to get net AR
what happens if previous period you had 1500 provision for doubtful debt, but then this period another 1000 bad debt and provision % remains same as last year - how do u book this
first Dr bad debt write off and Cr AR
then work out new total provision which is AR-BD x % but then subtract previous provision and the new addition to the account here is the DR doubtful debt expense and Cr provision for doubtful debt
then on BS you have new AR balance -write off -provision for DD last year + this year =net AR
what happens if previous year DD provision was 2000 and BD write off was 1000 where Gross AR was 41K (net 38k) but this time no write-off, new AR balance is 22k and provision still 5%
provision = 5% x 22k = 1100 change in DD = 2000-1100 = 900 decrease Dr Provision for doubtful debt (BS) Cr doubtful debt expense (IS) both of only 900 But then BS: AR = 22000 -DD (1100) Net AR of 20,900
