Week 5 Flashcards

1
Q

would adjusting entries be needed if you could wait to prepare financial statements when the business ended operatios

A

no they would not be required

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2
Q

what is the time period assumption

A

dividing the life of a business into artifical time periods

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3
Q

what lengths are time periods

A

month, quarter, semi annual or yearly

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4
Q

what are interim time periods

A

monthly and quarterly periods

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5
Q

how are annual time periods measured

A

either the calendar or financial year (1 July to June 30)

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6
Q

how are revenue and expenses recognised

A

through the revenue and expense recognition principles

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7
Q

what is the revenue expense recognition principle

A

that revenue be recognised in the accounting period in which an increase in future economic benefits has occured

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8
Q

what is the expense recognition principle

A

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

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9
Q

when can the 2 assumptions be applied

A

when the life of the business has been split into time periods

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10
Q

why are adjusting entries recorded

A

to make sure the revenue and expense recognition principles are followed

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11
Q

what occurs if adjusting entries are not made

A

profit for period and value of assets and liabilites will be incorrect

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12
Q

why do adjusting entries need to take place (errors)

A

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

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13
Q

what are the 2 types of adjusting entries

A

1: prepayments
2: accurals

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14
Q

what are the 2 types of prepayments

A

prepaid expenses

unearned revenue

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15
Q

what is a prepaid expense

A

expenses paid in cash and recorded as assets before they are used or consumed. Assets because they will provide future economic benefits

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16
Q

what is unearned revenue

A

cash recieved and recorded as liabilities before revenue is earned. Liability because business giving up economic benefits to earn revenue

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17
Q

what are the 2 types of accurals

A

accured revenue

accured expenses

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18
Q

what is an accrued revenue

A

revenue earned but not yet recieved in cash or recorded, recorded as assets. An asset because it will provide future economic benefit to business

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19
Q

what is accrued expenses

A

expenses incurred but not yet paid in cash or recorded. recorded as liability because business is sacrificing future economic benefits

20
Q

why are adjusted entries requried for prepayments

A

to record the portion of the prepayment that represents the expense or revenue earnt in the current accounting period

21
Q

what is the adjusting entry for a prepaid expense

A

DEBIT expense account

CREDIT asset account

22
Q

what is depreciation

A

is the allocation of the cost of an asset to expense over its useful life in a rational and systematic manner

23
Q

is depreciation an estimate or factual

A

an estimate

24
Q

what is the procedure for estimating depreciation

A

dividing cost of asset by useful life

25
how is annual depreciation calculated
cost - residual value divided by useful life
26
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
27
what is the carrying amount
original value - depreciation accured
28
what is the adjusting entry for unearned revenue
DEBIT: liability CREDIT: revenue
29
why are there adjusting entries for accurals
required to record revenue earned and expenses incurred in the current accounting period
30
what is the adjusting entry for accured revenue
DEBIT asset account | CREDIT revenue account
31
what is the adjusting entry for accured expenses
DEBIT expense | CREDIT liability
32
what is the formula for calculating accured interest
face value of loan X annual interest rate X time of terms in 12 months = interest
33
what is the adjusted trial balance
trial balance done after all adjsuting entries complete
34
what is a temporay account
relate only to a given accounting period
35
what is a permanent account
related to future accounting period
36
what accounts are closed in closing entries with 0 balance
temporary accounts
37
what are temporary accounts
revenue expenses drawings
38
what are permanent accounts
asset liability capital
39
where are temporary accounts transferred via closing entries
owners equity account
40
what account is revenue and expenses closed to before owners equity
profit and loss summary then loss or profit is transferedd to owners equity
41
what is the 1st closing entry (revenue)
debit each revenue account and credit profit and loss summary
42
what is the 2nd closing entry (expenses)
debit profit and loss summary for total expenses and credit each expense account
43
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
44
what is the 4th closing entry
debit capital for balance in drawings and credit drawings
45
what is the post closing trial balance
trial balance done after all closing entries complete
46
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