Week 5 - Lecture 5

Question 1

what is accrual accounting?

Answer 1

recognizes** income when earned **and **expenses when incurred, **not when cash transactions occur

Question 2

when is adjusting entries necessary in accrual accounting?

Answer 2

necessary at the** end of an accounting period** to ensure that **income and expenses are recorded in the period they relate to **
- these adjustments are crucial to **match income with the expenses incurred to generate that income **

Question 3

why are adjustments needed in accrual accounting?

Answer 3

to prevent inaccuracies, such as overstating profits by recognizing cash recieved as income before it is **actually earned **

Question 4

What is accrued revenue?

Answer 4

• income that has been **earned but not yet recieved in cash **
• example: **if a *company earns interest on a term deposit, but the interest is to be paid at a later date*, an *adjustment is made *to recognize this income
• adjustment: increase interest recieveable and interest income by the *earned amount *

Question 5

what is accrued expenses?

Answer 5

• expenses that have been incurred but not yet paid in cash
  -** example:** if **wages are owed to employees **at the end of the period but are **not due until the next period **
• adjustment: increase wages payable (liability) and wages expense (expense)

Question 6

what is unearned revenue?

Answer 6

• cash payments recieved for goods or services to be **provided in the future **
• example: if a customer pays in advance for goods to be delivered later, the company records it as a liability (unearned revenue) until the goods are delivered
• adjustment: decrease unearned revenue (liability) and* recognize sales revenue *(income) when the goods are delivered

Question 7

what are prepayments?

Answer 7

• cash payments made for expenses that will be incurred in the future **
  **- example: *prepaid rent*, where the *company has paid for rent *covering several months
  - adjustment: **decrease prepaid rent (asset) and recognize rent expense (expense) as it is *consumed over time *

Question 8

what is depreciation?

Answer 8

• the allocation of the cost of a non-current asset over its **useful life **
• example: if a company buys a van for $55,000, depreciation is recorded to reflect the wear and tear or usage of the asset over time *
  **- adjustment: **increase depreciation expense* (expense) and increase accumulated depreciation (contra-asset)

Question 9

what are contra assets and how do they relate to depreciation?

Answer 9

a contra asset reduces the value of a related asset.
- for example, accumulated depreciation offsets the value of a delivery van on the **balance sheet **
- depreciation: recorded as an expense to reflect the reduction in the van’s value, while accumulated depreciation is the total depreciation that has been *recorded against the asset *

Question 10

define profit before tax (PBT) vs profit after tax (PAT)

Answer 10

• profit before tax (PBT): income minus expenses, before considering taxes
• profit after tax (PAT): profit after accounting for taxes

Question 11

define earnings before interest and tax (EBIT)

Answer 11

a measure of profitability that **excludes the effects of financing decisions **(interest) and taxation, providing a **view of the core business performance **

Question 12

Define earnings before interest, tax, depreciation and amortisation (EBITDA)

Answer 12

similar to EBIT, but excludes non-cash expenses like depreciation and amortisation, providing a clearer picture of operating performance