Wk2 Profit Measurement and the Accounting Cycle

Question 1

Accrual basis

Answer 1

Transactions recorded:
- When revenues are earned
- When expenses are incurred
- Regardless of when cash is received or paid

Question 2

Cash basis

Answer 2

Transactions recorded:
- When cash is received
- When cash is paid
- Regardless of when revenue is earned or expense is incurred

Question 3

The accounting cycle

Answer 3

The process by which businesses produce their financial statements for a specific period of time.

Question 4

Why do we need adjusting entries?

Answer 4

Accrual basis of accounting:
– Some transactions may involve two or more accounting periods
– Focus on the incurrence of income and expenses, not the receipts and
payments of cash.

Income statement:
- Income and expense accounts need to be adjusted to reflect what have incurred for the financial period.

Balance sheet:
- Assets, liabilities and equity accounts need to be adjusted to reflect their latest balances as at the end of financial period.

Question 5

What is adjusted?

Answer 5

• Prepaid expense (asset)
• Unearned revenue (liability)
• Consumption of supplies (current asset, gets used quickly)
• Depreciation (non-current asset)
• Any other Rev/Expense incurred but not yet recognised.

Question 6

Why do we need an adjusting entry for unearned revenue to revenue?

Answer 6

Need adjusting entry to accurately reflect:
1. Revenue - the portion actually earned in the Income Statement, and
2. Liability - the correct remaining liability in the Balance Sheet

Question 7

Why do we need an adjusting entry for prepaid expense to expense?

Answer 7

Need adjusting entry to accurately reflect:
1. Expenses - the used up portion in the Income Statement, and
2. Asset - the correct remaining amount in the Balance Sheet

Question 8

Why do we need an adjusting entry for revenue earned but cash is not yet received?

Answer 8

Need adjusting entry to accurately reflect:
1. Revenue - the portion actually earned in the Income Statement
2. Asset - the amount actually owed by customers/clients in the
Balance Sheet (e.g. accounts receivable)

Question 9

Why do we need an adjusting entry for non-current depreciable asset to depreciation expense?

Answer 9

Need adjusting entry to accurately reflect:
1. Expenses – charging the used part of assets as expense in the
Income Statement, and
2. Asset – Balance Sheet to show the amount after usage

Question 10

Accumulated depreciation account

Answer 10

– does what its name suggests it does – accumulates dep’n
– contra asset account to non-current assets – on the asset
section of balance yet it carries a Credit normal balance

Question 11

Adjusted trial balance

Answer 11

• Provides the adjusted balances
• It is done after all adjusting entries have been recorded