Week 5 Flashcards
would adjusting entries be needed if you could wait to prepare financial statements when the business ended operatios
no they would not be required
what is the time period assumption
dividing the life of a business into artifical time periods
what lengths are time periods
month, quarter, semi annual or yearly
what are interim time periods
monthly and quarterly periods
how are annual time periods measured
either the calendar or financial year (1 July to June 30)
how are revenue and expenses recognised
through the revenue and expense recognition principles
what is the revenue expense recognition principle
that revenue be recognised in the accounting period in which an increase in future economic benefits has occured
what is the expense recognition principle
dictates that expenses be recognised in the accounting period when a decrease in future economic benefits has occured. may or may not be same period in which expense is paid
when can the 2 assumptions be applied
when the life of the business has been split into time periods
why are adjusting entries recorded
to make sure the revenue and expense recognition principles are followed
what occurs if adjusting entries are not made
profit for period and value of assets and liabilites will be incorrect
why do adjusting entries need to take place (errors)
1: events not journalised because too time consuming
2: costs expire with passage of time rather then daily transactions
3: items may be unrecorded that are not recieved until next accounting period
what are the 2 types of adjusting entries
1: prepayments
2: accurals
what are the 2 types of prepayments
prepaid expenses
unearned revenue
what is a prepaid expense
expenses paid in cash and recorded as assets before they are used or consumed. Assets because they will provide future economic benefits
what is unearned revenue
cash recieved and recorded as liabilities before revenue is earned. Liability because business giving up economic benefits to earn revenue
what are the 2 types of accurals
accured revenue
accured expenses
what is an accrued revenue
revenue earned but not yet recieved in cash or recorded, recorded as assets. An asset because it will provide future economic benefit to business
what is accrued expenses
expenses incurred but not yet paid in cash or recorded. recorded as liability because business is sacrificing future economic benefits
why are adjusted entries requried for prepayments
to record the portion of the prepayment that represents the expense or revenue earnt in the current accounting period
what is the adjusting entry for a prepaid expense
DEBIT expense account
CREDIT asset account
what is depreciation
is the allocation of the cost of an asset to expense over its useful life in a rational and systematic manner
is depreciation an estimate or factual
an estimate
what is the procedure for estimating depreciation
dividing cost of asset by useful life
how is annual depreciation calculated
cost - residual value divided by useful life
how is depreciation presented in the statement of financial position
it is a contra asset account placed after asset being depreciated with the carrying amount shown
what is the carrying amount
original value - depreciation accured
what is the adjusting entry for unearned revenue
DEBIT: liability
CREDIT: revenue
why are there adjusting entries for accurals
required to record revenue earned and expenses incurred in the current accounting period
what is the adjusting entry for accured revenue
DEBIT asset account
CREDIT revenue account
what is the adjusting entry for accured expenses
DEBIT expense
CREDIT liability
what is the formula for calculating accured interest
face value of loan X annual interest rate X time of terms in 12 months = interest
what is the adjusted trial balance
trial balance done after all adjsuting entries complete
what is a temporay account
relate only to a given accounting period
what is a permanent account
related to future accounting period
what accounts are closed in closing entries with 0 balance
temporary accounts
what are temporary accounts
revenue
expenses
drawings
what are permanent accounts
asset
liability
capital
where are temporary accounts transferred via closing entries
owners equity account
what account is revenue and expenses closed to before owners equity
profit and loss summary then loss or profit is transferedd to owners equity
what is the 1st closing entry (revenue)
debit each revenue account and credit profit and loss summary
what is the 2nd closing entry (expenses)
debit profit and loss summary for total expenses and credit each expense account
what is the 3rd closing entry (P and L)
debit profit and loss summary and credit capital for profit. if a loss credit profit and loss summary and debit capital
what is the 4th closing entry
debit capital for balance in drawings and credit drawings
what is the post closing trial balance
trial balance done after all closing entries complete
what is the accounting cycle
1: analyse business transactions
2: journalise transactions
3: post to ledger accounts
4: prepare trial balance
5: journalise and post adjusting entries
6: prepare an adjusted trial balance
7: prepare financial statements
8: journalise and post closing entries
9: prepare post closing trial balance
