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Flashcards in Accounting Deck (81)
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31

Name what Income / Revenue / Gains does and doesn't include.

Does Not Include:

- monies received for the sale of assets used within the
entity
- capital income

Does Include:

- sales (both cash sales and credit sales)
- fee income
- bank interest received
- rental income
- profit/gain made on the sale of assets used within the entity

32

Define Expenses/Loss

“decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants”

33

Name what Expenses/Loss does and doesn't include.

Does Not Include:

- other distributions of profit/loss to owners

Does Include:

- a payment (or promise to make a payment) for a benefit received

- Losses made on the sale of assets used within the entity

34

What are Capital Expenses?

1. Non-Current Asset

2. Additions to an Asset

3. Expenses incurred in acquiring those assets and preparing them for use

35

What is Revenue Expense?

monies spent on running the business on a day-to -day basis in order to generate income and benefit the current accounting period.

36

What is the equation for net profit/loss?

Income – Expenses = Net profit/(loss)
(revenue) - (revenue expenses)

37

What is The Statement of Profit & Loss and The Accounting Equation?

Assets = Liabilities + Capital =>
Assets - Liabilities = Capital =>
Assets - Liabilities = Capital + Profit (income - expenses)

38

What is Book-Keeping?

A systematic way to record financial transactions

Has been in use since early days of trading

Based on the accounting equation principle:
for every financial transaction, two entries are made in the books of account/ledger

An account can be looked upon as a diary or a history detailing the things that happen in relation to a particular item

Manual or computerised

Ledgers or journals

time consuming

39

What is the Cash Book?

Records bank and/or cash transactions

A record of receipts and payments:

- A bank receipt/deposit represents an increase in
the bank account

- A bank payment represents a decrease in the
bank account

40

What is the Trial Balance?

List of balances taken from the books of account

Can be extracted at any point in time

Tests duality concept

Tests if books of account agree arithmetically

Basis for preparing the financial statements

41

What does the trial balance not detect?

Errors of Omission
Transaction has been completely omitted

Errors of Commission
Double-entry is made, but to the wrong accounts

Errors of Principle
Double-entry is made, but to the wrong type of account

42

What does the trial balance not detect? (2)

Compensating Errors
Where an error is exactly compensated by another error in the opposite direction

Errors of Original Entry
The original entry has been entered incorrectly in both accounts

Errors of Transposition
The individual digits making up a number have been written in the wrong order in one of the ledger accounts. A transposition error is always divisible by 9.

43

What is closing stock/inventory?

Duality concept - For each financial transaction, two entries are made in the books of account

Accounting treatment - Take the inventories from the cost of sales and transfer it to the SFP as a current asset

Cost of Sales Reduce AND Current Assets Increase

44

Why do Cost of Sales AND Current Assets Increase when looking at the closing stock/inventory?

Why ? - this inventory has not been sold and is still an asset at the year end. It will therefore reduce the COGS/COS (expense), and increase the gross profit.

45

What is opening stock/inventory?

Duality concept - For each financial transaction, two entries are made in the books of account

Accounting treatment - Take the inventories from the cost of sales and transfer it to the SFP as a current asset

Current Assets reduce AND Cost of Sales increase

46

Why do Current Assets reduce AND Cost of Sales increase when looking at the opening stock/inventory?

Why? - when we start a new accounting period it is added to the pile of stuff available to be sold, and therefore needs to be shown as a cost of sale in the new accounting period.

47

What is the Accrual Concept?

“Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity's economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.”

48

What is Stock / Inventories?

The goods that have been purchased or produced by an entity for resale that have not yet been sold

Can be Finished Goods, Work-in-Progress and Raw Materials

Stock/Inventories counted and valued at least once a year (usually at the end of a financial year)

Valued in accordance with IAS 2: Inventories

49

IAS 2: Inventories

What’s shown on the Statement of Financial Position should be the lower of cost and net realisable value
(Prudence concept)

Net realisable value is the estimated selling price less estimated selling costs, including cost

Cost is on basis of FIFO or weighted average

50

What is The Accrual /
Accrued Expense?

an expense that has been incurred, but for which an invoice has not yet been received or paid or charged

similar to a creditor/trade payable

Common where services are paid in arrears
gas – electric – phone – wages

Duality concept – accounting for accrued expenses
(1) Expense account (I/S) Increases AND
(2) Accrual account (SFP) Increases

51

What is Accrued Income?

income that has been earned, but for which an invoice has not yet been sent out

similar to a debtor/trade receivable

revenue recognition

Duality concept – accounting for accrued income
(1) Income account (I/S) Increases AND
(2) Accrued Income account (SFP) Increases

52

What is The Prepayment?

an expense which has been incurred, but the benefit from it will not be provided until the following accounting period

it is an asset/resource waiting to be used

common where services are paid for in advance

Duality concept – accounting for the prepayment
(1) Expense account (I/S) Decreases AND
(2) Prepayment account (SFP) Increases

53

What is a Bad Debt?

A bad debt is a debtor who you know will not be able to settle their balance with you.
Reasons may be : - Insolvency
- Death
Must be written off

Duality concept – accounting for a bad debt
(1) Bad debt w/off (expense) Increase AND
(2) Receivables account Decrease

54

What is a doubtful debt?

A doubtful debt is a debtor who you suspect will not be able to settle their balance.

Often a business will provide for a certain percentage of their debtors as being doubtful

A doubtful debt provision is created

55

What is Capital Expenditure and its characteristics?

Definition: Expenditure that will benefit more than one accounting period.

Characteristics:
- expenditure is likely to be substantial
- benefits of it are difficult to define & allocate
- helps to achieve organisations long term objectives

Examples: Land & Buildings, Plant , Motor Vehicles

56

What is the difference in revenue expenditure and capital expenditure?

The cost of expenditure ought to be charged to the income statement in the accounting period that benefits from it.

Revenue expenditure – charged to the current accounting period

Capital expenditure – may have to be allocated over several accounting periods → via depreciation

57

What is Depreciation?

Depreciation is the allocation of cost of a non-current
asset to the income statement which benefits from the use
of that non-current asset.

IAS 16 definition:
“ the systematic allocation of the depreciable amount of an
asset over its useful life”

Depreciable amount is “the cost of the assets, or other
amount attributed to that asset less its residual value”

58

What is Purchasing a non-current asset?

Duality concept : (1) Non-current asset – increases
(2) Bank account – decreases

Non-Current Asset shown in the Balance Sheet/SFP
- benefits of it are difficult to define and allocate
- helps to achieve organisations long term objectives
- therefore all ultimately expensed to the Income Statement

59

What are Tangible Fixed Assets and Intangible Fixed Assets?

Tangible Fixed Assets/NCA
- assets that have physical substance
- held for use in the production or supply of goods or
services or administrative purposes
- expected to be used in more than one period

Intangible Fixed Assets/NCA
“identifiable non-monetary assets without physical substance”
patents trademarks copyrights brands

60

What are the definitions for cost, residual value and depreciable amount?

Cost: cost directly attributable to bringing the asset into working condition for its intended use

Residual value: the net realisable value of an asset at the end of its useful economic life. Residual values are based on prices prevailing at the date of the acquisition (or revaluation) of the asset and do not take account of expected future price changes

Depreciable amount: the cost of a tangible non-current asset less its residual value