Week 5- Profit or Loss: Adjustments Flashcards
Describe the credit/debit situation in terms of assets
Debits increase
credits decrease
Describe the credit/debit situation in terms of liabilities
Decrease in debits
increase in credits
Describe the credit/debit situation in terms of expenses
Increase debits or decrease credits
Describe the credit/debit situation in terms of income
increases credits and decreases credits
what are the three main aspects regarding adjustments?
Depreciation, bad debts (and provision for doubtful debts) and income and expenses which are pre-paid or accrued
what is the period of time called that a business uses an asset for?
the assets useful life
why must an asset be expensed over its useful life?
Because this is the cost of having the asset and becomes part of the cost of generating the income over a financial year
what is the definition of depreciation?
The systematic allocation of the cost of an asset over its useful life
what is the cost price of an asset?
what was paid for the asset
what is accumulated depreciation?
the total of all depreciation on that particular asset to date
what is the carrying amount of a asset?
Cost price minus accumulated depreciation
what is the residual value of the asset?
how much the asset is expected to be sold for at the end of its useful life
what is the depreciable amount of the asset?
cost price minus residual value (the amount which will actually be depreciated)
what is the depreciable amount of the asset?
cost price minus residual value (the amount which will actually be depreciated)
what are the two accounts that are affected when we calculate depreciation
Depreciation (expense) on the SoPL which increases on the debit side
Accumulated depreciation on the SoFP increases on the credit side
Is accumulated depreciation a negative or positive asset in the SoFP?
Negative, it reduces the recorded value of the asset
what are the two methods for working out depreciation?
Straight-line method and the diminishing balance method
describe how you calculate the straight-line method of depreciation?
Cost price - residual value ( How much the asset is expected to be sold for) divided by the number of years in its useful life.
describe how you calculate the diminishing balance method?
Cost price - accumulated depreciation x percentage. This means that the depreciation to be expensed every year declines
what influences the choice over which depreciation method you use?
Will the asset be evenly generating income over the period? Will it have higher productivity initially?
do you use the same method of depreciation for all assets in a category?
Yes eg. equipment
What are debts called that we won’t be getting any money back from?
Bad debts
where are bad debts initially recorded?
under trade receivables
describe the two entries we would have to make on our financial statements when adjusting for bad debts
Increase bad debts (exp) on the SoPL (DR) and reduce receivables (SoFP) (Cr)
what is the account called for debts that are unlikely to be paid?
Provision for doubtful debts
are transactions that have been charged at a discounted price recorded with the discount or at the original price?
At the discounted price
Do we keep expenses that we have paid for but relate to future financial years in our financial statements?
No. The accounts should move as such: Expenses decrease (Cr) and expenses prepaid (CA) will increase (DR)
Do we keep expenses we have not paid for but that relate to future financial years in our financial statements?
Yes. The accounts should move as such: Expenses increase (Dr) and expenses accrued (CL) will increase
Should income that we have received prior to the financial year it relates to be kept in the financial statement for that year?
Yes. The accounts should move as such: Income must decrease (DR) and income received in advance (CL) should increase (Cr)
Should income that we have not received yet be recorded in the financial statements?
Yes. The accounts should move as such: Income should increase (Cr) and income accrued (CA) should increase (DR)
