Week 5 - Topic 5 - Recording information (part 3) Flashcards
What are Balance Day Adjustments?
Entries made at the end of an accounting period to update values of assets, liabilities, incomes, or expenses are essential for accrual accounting.
What are the 2 main types of Balance Day Adjustments?
- Accruals
- Prepayments
Define Accruals in terms of Balance Day Adjustments?
where cash flow has not occurred yet, but the item needs to be recorded
Define Prepayments in terms of Balance Day Adjustments.
where the cash flow had already occurred, and was recorded, but now needs to be altered
Define Accrued Income?
where income has been earned but has not been received in cash and not recorded yet.
What/how does accruals deal with items?
Accruals deal with items that involve a cash flow occurring after the income has been earned or the expense incurred.
Fill in the following one-word gap: Accruals bring in _____ information to the accounting records.
NEW
Define Prepaid Income?
where cash has been received by the business for income it has not yet earned. It is often recorded as a liability in the majority of situations, as we’ve received the income already, but still owe the customer the good/service.
Define Prepaid Expenses?
are a payment made in advance, recorded as an asset until incurred (in the majority of cases), following the matching principle in accrual accounting.
Define Depreciation?
Depreciation allocates a non-current asset’s cost over its useful life, ensuring accurate expense recognition.
Define Accumulated Depreciation?
is a contra-asset account that offsets non-current assets, increasing on the right like liabilities. It records total depreciation since acquisition, with each asset having its own account, reducing its value on the Balance Sheet.
Define Useful life?
the period over which an asset is expected to be available for use by an entity.
Define Residual value?
The estimated amount that an entity would currently obtain from disposal of the asset…at the end of its useful life.
Define Depreciable Amount?
the cost of an asset, or other amount substituted for its cost, less its residual value.
Define Carrying Amount?
the amount at which an asset is recognised after deducting accumulated depreciation.
What does ‘offering credit to customers or clients’ mean?
Whenever a business provides goods or services on credit, there is always a risk that a proportion of the accounts receivable will not pay their accounts.
Define Doubtful debt?
one that may not be collectible
Define Bad Debt?
one that is written off as collectible
What are the 2 ways to account for bad and doubtful debts?
- The Direct Write-Off Method
- The Allowance Method
Define and explain The Direct Write-Off Method?
No allowance is made in advance. The Bad Debts Expense is recognised only when an account is considered uncollectible.
Define and explain The Allowance Method?
It lets a portion of Accounts Receivable be considered doubtful in the same period income is earned. If a debt is later deemed bad, part of the allowance is used. We record the debt as ‘written off’.
What are the 2 ways that we can estimate the allowance in the allowance method?
- Based on Credit Sales/Service income
- Based on a % of Accounts Receivable
Define and explain how we can estimate the allowance based on Credit Sales/Service income?
By looking at income earned on credit during the year and allowing a % to be considered as doubtful debt. Past history, customer details, and other conditions can also help to determine a conclusion.
Define and explain how we can estimate the allowance based on a % of Accounts Recievable?
by looking at the closing balance of accounts receivable and allowing a % to be considered as doubtful debt.
Explain the concept of ‘Aged analysis of accounts receivable balance’?
focusing on how long balances have been outstanding to estimate the proportion that are uncertain.
Do adjusting entries ever involve cash?
NO, NO ADJUSTING ENTRY EVER INVOLVES CASH
Define ‘Revenues received in advance’?
cash received before the revenue recognition criteria have been met is recorded by increasing (crediting) a liability account.
Define ‘Reversing entry’?
made at the beginning of the next accounting period and is the exact opposite of the adjusting entry made in the previous period.
Define Receivables?
refers to the amounts due from individuals and businesses.
Define ‘Notes receivable’?
represent claims for which formal instruments of credit are issued as evidence of the debt.
What is the ‘Promissory note’?
is a written promise to pay a specified amount of money at a definite time
