Ch6: Income statement and statement of changes in equity Flashcards
statement of profit or loss
Reflects the accounting return for an entity over a specified time period.
equation for profit
Profit = Income - Expenses
where is the profit/loss figure in the balance sheet?
It is in the retained earnings account under the equity section after share capital in the balance sheet.
triple bottom line reporting
Entities often articulate their governance, environmental and social policies and report on their environmental and social performance in addition to their financial performance.
reporting period
- Defined as a period of time to which the financial statements relates.
- For GPFS, the reporting period is yearly (sometimes half yearly reports (interim reports) are prepared and released by public companies).
- Entities prepare financial statements at the end of every 12 months (not necessarily a calendar year).
accrual accounting
- A system in which transactions and events are recorded in the periods they occur, instead in the period cash is received/paid.
- Accounting standards require financial statements to be prepared on the basis of accrual accounting.
- Sales or purchases are either cash/credit. Under accrual accounting, it allows you to include credit transactions in profit calculation.
cash accounting
- A system that determines performance as the difference between the cash received in relation to income items and the cash paid for expenses.
- Transactions are recorded when cash is paid or received. Then profit and loss is calculated.
accrued income
- Income is recognised without receipt of cash.
- The income/revenue has been earned by providing a good/service, but has yet to be received (e.g. sale of goods on credit).
- Recorded as Dr Accrued income, Cr Income
income received in advance (deferred revenue)
- Cash is received but income is not recognised.
- Must be recognised as a liability, until income is earned (e.g. receipt of rent from a tenant that paid in advance).
- Recorded as Dr Cash, Cr Unearned revenue
accrued expense
- Expense is recognised without payment of cash.
- Yet to pay for an expense that we have consumed or used (e.g. wages expense)
- Recorded as Dr Expense, Cr Accrued expense (expense payable)
accrual accounting adjustments
- Some income may have been recognised during the period as a liability (revenue received in advance), but by the end of the period a part of it is earned (as service is provided).
Dr Cash, Cr Unearned revenue
→ Dr Unearned revenue, Cr Revenue - Some expenses may have been recognised during the period as an asset (prepaid expense), but by the end of the period a part of it is incurred (as service is received).
Dr Prepaid expense, Cr Cash
→ Dr Expenses, Cr Prepaid expense - Some income and expenses may not be recognised (e.g. depreciation expense, impairment loss, bad debts expense, cost of sales, wages, rent).
depreciation
- It is the systematic allocation of the cost of a tangible (intangible) asset over its useful life.
- The depreciation calculated for a period is recognised as depreciation expense at the end of the period.
- Recorded as Dr Depn expense, Cr Accumulated depn
straight line depreciation method
Annual depreciation = (Cost - Residual value)/No. of useful life
diminishing balance depreciation method
Annual depreciation = (Cost - Accumulated depreciation) x Depreciation rate
units of production depreciation method
Annual depreciation = (Cost - Residual value) x (No. of units produced/Total no. of units expected to be produce over the useful life)
