Balance Day Adjustments Flashcards
(20 cards)
What is the balance day adjustment?
Adjustment made to revenue and expense accounts at the end of a period so the earned revenue and incurred expense are equal.
What assumptions does balance day adjustment ensures?
Accrual basis assumption (Profit = Earned Revenue - Incurred Expense)
Going concern assumption (Business continue to operate in future)
Period assumption (Balance day adjustments calculated each period)
What is the prepaid expense?
Expense paid during the period but have not yet used (current asset)
Richmond Sports Apparel paid $4800 (plus GST) for a year long insurance premium on 1 September 2023. They complete their reports yearly on 30 June. (Prepaid Expense)
1 Sep
Dr PPE (4800)
Dr GST (480)
Cr Cash (5280)
30 Jun
Dr E (4000)
Cr PPE (4000)
What is accrued expenses?
Expenses used during the period but are not yet paid (current liability).
Richmond Sports Apparel owes $6000 wages to staff at the end of the period ended 30 June 2023 that will be paid on 7 July. Richmond Sports Apparel pays $12,000 for wages on 7 July 2023 that includes $6,000 for this period and $6,000 for last. (accrued expenses)
30 June
Dr E (6000)
Cr ACE (6000)
7 July
Dr E (6000)
Dr ACE (6000)
Cr Cash (12000)
What is unearned revenue?
Revenue received in advance but are not yet earned (current liabilities)
Bayside Brewery accepted an order for 100 cases of beer for a wedding to be held 26 January 2024. To secure the order, they asked for and received a $1000 deposit for the $60,000 worth of sales on January 4 2024. The goods were delivered early 26 January, along with invoice XTC34 for $59,000 owed plus $6,000 GST. (unearned revenue)
4 Jan
Dr Cash (1000)
Cr UER (1000)
26 Jan
Dr UER (1000)
Cr R (1000)
Dr AR (65000)
Cr R (59000)
Cr GST (6000)
Dr COS (15000)
Cr Inv (15000)
What is accrued revenue?
Revenue that has been earned but has not yet received (current asset).
On 30 April 2024 Richmond Sports Apparel had an excess $40,000 so invested it in a 2 year fixed term deposit earning 9% interest p.a payable annually. They prepare reports annually at 31 December. (accrued revenue)
30 Apr
Dr Cash (3600)
Cr R (1200)
Cr ACCR (2400)
31 Dec
Dr ACCR (2400)
Cr R (2400)
What is trial balance?
List of all general ledger accounts and their balances?
What is adjusted trial balance?
List of all ledger accounts and their balances once all balance day adjustments have been recorded.
Why do we have trial balance and adjusted trial balance?
To check whether any recording errors by seeing whether total debits equal total credits.
Example of errors
- Reverse of debit and credit entries
- Compensating errors
- Omission of transaction altogether
What is bad debt?
An expense account created when an accounts receivable is written off as irrecoverable.
What is an allowance for doubtful debts?
Negative asset amount based on estimates of future bad debts.
How to record bad and doubtful debts on general journal?
Dr Bad debts
Cr Allowance for doubtful debts
How to record bad debts?
Dr Allowance for doubtful debt
Dr GST
Cr AR
How to record bad debts with part receipt of cash?
Dr Cash
Dr Allowance for doubtful debts
Dr GST
Cr AR
How to adjust the allowance for doubtful debts account?
Dr Bad debts
Cr Allowance
What qualitative characteristic does creating an allowance for doubtful debts satisfies?
Relevance as it reports information that is capable of making a different to the decisions made by users.
