7. Revenue, Income and expenses

Question 1

Explain with an accounting theory why do business make adjustment to income and expenses at the end of the financial year.

Answer 1

This is accordance to accrual basis of accountingwhich states that expenses and income must be recognized in the period the services has been used or earned, regardless of whether payment has been made or received or not so as to obtain an accurate amount of profit for the year.Hence business make adjustment to expenses incurred and income earned at the end of the financial yearsoas to obtain an accurate amount of profit for the year.

This is accordance to matching concept which state that the expenses incurred must be matched to the income earned in the same accounting period to determine the correct profit for the period.Hence business make adjustment to expenses incurred and income earned at the end of the financial yearsoas to obtain an accurate amount of profit for the year.

Question 2

Name all double entries that you should have for this topic and the date of transaction

Answer 2

1. SFY: Reversal entries
2. During / EFY: paid expenses or received income
3. EFY: Adjustment for income and expenses
4. EFY: Closure /transfer of expenses incurred and income earned to income summary.

Question 3

1. What the nature of prepaid expenses?
2. Explain why?
3. Hence what is the DE for prepaid expenses
   (i) @ SFY
   (ii) @ EFY

Answer 3

1. DR.
2. Because it is a current asset in sfpos
   3 (i) SFY (reversal): Dr XXX Expenses
   Cr Prepaid XXX expense

3 (ii) EFY: Dr Prepaid XXX expenses
Cr XXX Expenses.

Question 4

1. What the nature of expenses payable ?
2. Explain why?
3. Hence what is the DE for expenses payable
   (i) @ SFY
   (ii) @ EFY

Answer 4

1. CR.
2. Because it is a current liability in sfpos
   3 (i) SFY (reversal): Dr XXX Expenses payable
   Cr XXX Expense

3 (ii) EFY: Dr XXX Expenses
Cr XXX Expenses papyable .

Question 5

1. What the nature of income receivable?
2. Explain why?
3. Hence what is the DE for income receivable
   (i) @ SFY
   (ii) @ EFY

Answer 5

1. DR.
2. Because it is a current asset in sfpos
   3 (i) SFY (reversal): Dr XXX income
   Cr XXX income receivable

3 (ii) EFY: Dr XXX income receivable
Cr XXX income.

Question 6

1. What the nature of income received in advance?
2. Explain why?
3. Hence what is the DE income received in advance
   (i) @ SFY
   (ii) @ EFY

Answer 6

1. CR.
2. Because it is a current liability in sfpos
   3 (i) SFY (reversal): Dr XXX income received in advance
   Cr XXX income

3 (ii) EFY: Dr XXX income
Cr XXX income received in advance

Question 7

1. Which DE (a to d from below) the figure is referring to when additional information in question says business received $XXX income?

a. SFY: Reversal entries
b. During / EFY: paid expenses or received income
c. EFY: Adjustment for income and expenses
d. EFY: Closure /transfer of expenses incurred and income earned to income summary.

2. What is the double entry?

Answer 7

1. b
2. Dr Cash at bank
   Cr XXX Income

Question 8

1. Which DE (a to d from below) the figure is referring to when additional information in question says business paid $XXX expense?

a. SFY: Reversal entries
b. During / EFY: paid expenses or received income
c. EFY: Adjustment for income and expenses
d. EFY: Closure /transfer of expenses incurred and income earned to income summary.

2. What is the double entry?

Answer 8

1. b
2. Dr XXX expense
   Cr Cash at bank

Question 9

1. Which DE (a to b from below) the figure is referring to when additional information in question says annual income was $XXX or income earned for the year was $XXX?

a. SFY: Reversal entries
b. During / EFY: paid expenses or received income
c. EFY: Adjustment for income and expenses
d. EFY: Closure /transfer of expenses incurred and income earned to income summary.

2. What is the double entry?

Answer 9

1. d
2. Dr XXX income
   Cr income summary

Question 10

1. Which DE (a to d from below) the figure is referring to when additional information in question says annual expense was $XXX or expenses incurred for the year was $XXX?

a. SFY: Reversal entries
b. During / EFY: paid expenses or received income
c. EFY: Adjustment for income and expenses
d. EFY: Closure /transfer of expenses incurred and income earned to income summary.

2. What is the double entry?

Answer 10

1. d
2. Dr Income summary
   Cr XXX expense

Question 11

Which DE (a to d from below) do we refer to get figures for sfper?

a. SFY: Reversal entries
b. During / EFY: paid expenses or received income
c. EFY: Adjustment for income and expenses
d. EFY: Closure /transfer of expenses incurred and income earned to income summary.

Answer 11

d.

The income summary figure is recorded in to sfper in “add other income” and “less other expenses”

Question 12

Which DE (a to d from below) do we refer to get figures for sfpos?

a. SFY: Reversal entries
b. During / EFY: paid expenses or received income
c. EFY: Adjustment for income and expenses
d. EFY: Closure /transfer of expenses incurred and income earned to income summary.

Answer 12

c.  
The adjustment entries are recorded in the sfpos as either CA or CL
 - prepaid XXX expenses (CA)
- XXX income receivable (CA)
- XXX expenses payable (CL)
- XXX income receivable in advance (CL)

Question 13

What is the effect on profit and CA when prepaid expenses is not adjusted?

Answer 13

profit will be understated by $XXX [because expenses overstated]
current asset will be understated by $XXX

Question 14

What is the effect on profit and CA when prepaid expenses is adjusted?

Answer 14

profit increase by $XXX

Current asset increase by $XXX

Question 15

What is the effect on profit and CA when expenses payable is not adjusted?

Answer 15

profit will be overstated by $XXX [because expenses understated]
current liability will be understated by $XXX

Question 16

What is the effect on profit and CA when expenses payable is adjusted?

Answer 16

profit will decrease by $XXX

Current liability increase by $XXX

Question 17

What is the effect on profit and CA when income receivable is not adjusted?

Answer 17

profit will be understated by $XXX [because income understated]
current asset will be understated by $XXX

Question 18

What is the effect on profit and CA when income receivable is adjusted?

Answer 18

profit will increase by $XXX

Current asset increase by $XXX

Question 19

What is the effect on profit and CA when income received in advance is not adjusted?

Answer 19

profit will be overstated by $XXX [because income overstated]
current liability will be understated by $XXX

Question 20

What is the effect on profit and CA when income received in advance is adjusted?

Answer 20

profit decrease by $XXX

Current liability increase by $XXX