WK 3: Balancing, Depreciation and Bad Debts

Question 1

What 3 main financial statements in set of accounts

Answer 1

Statement of profit or loss
statement of financial position (balance sheet)
statement of cash flow

Statement of financial position uses accounting eqn. to examin assets, liabilities, owners’ equity of business

Question 2

what is an accrual

Answer 2

arises when expenses has been incurred but not paid for by the date when the statement of financial position is prepared

Question 3

what is a prepayment

Answer 3

arises where expenses have been paid before the statement of financial position date but the benefit of that expense will be experienced in the next FY

Question 4

Adjustments - how to calculate an Accrual?

Answer 4

calculates the expense to be included in statement of profit or loss by taking the trial balance figure for the expense concerned and adding on the amount of accrual

Question 5

Historic cost concept: what is it?

Answer 5

requires transactions to be recorded at their original cost to the business, and as a result, the assets of a business are incl. at their historic statement of financial position

Question 6

going-concern concept

Answer 6

when producing accounts, there is an assumption that the business will continue to operate for the foreseeable future, unless there is evidence to suggest it will not

Question 7

what is depreciation

Answer 7

allocation of cost of the asset over its useful life

non-current assets will benefit a business over no. of years

depreciation spreads cost of asset over the years in which benefit will be obtained

Estimated useful life - expected length of time that a non-current asset will be used

Residual value - estimated amount that a non-current asset will be worth at the end of its useful life

Question 8

What is a bad debt

Answer 8

Bad debt arises when a customer who owes money to the business for goods or services received on credit become unable to pay amount due. At the time it should no longer be included in trade receiveables /not represent an asset

Question 9

What is depreciation expense

Answer 9

Amount charged to statement of profit/loss to spread the cost of non-current assets over the life of those assets.

Question 10

What is the net book value (NBV)

Answer 10

found by taking the cost of an asset and deducting the accumulated depreciation that has been charged on that asset since it was purchased.