topic 5 Flashcards
(15 cards)
What are balance day adjustments?
- Entries made on the last day of an accounting period (often 30 June, but could be end of month if monthly reports are prepared for internal use).
- Recorded like other transactions (in journals, then posted to ledgers).
- essential part of accrual accounting.
why are balance day adjustments needed
- To ensure that the financial statements show appropriate amounts at the end of an accounting period when reports are prepared.
- They often arise due to timing differences in relation to earning income (and receiving the cash) and incurring expenses (and the cash outflow).
adjusting income and expenses
By adjusting income and expenses, they ensure the appropriate amount of profit or loss (performance) is reported in the income statement.
adjusting assets and liabilities
By adjusting assets and liabilities, they ensure the appropriate financial position is presented in the balance sheet.
2 types of balance day adjustments
- accruals
- prepayments
balance day adjustments - accruals
where the cash flow has not occurred yet, but the item needs to be recorded => adjustments record new information
- expenses
- incomes
balance day adjustments - prepayments
where the cash flow had already occurred, and was recorded, but now needs to be altered => adjustments to existing information
- Expenses
- Incomes
Accruals relating to income
recording income for work that has been performed by the business but not invoiced
Accruals relating to expenses
recording an expense that was incurred in the accounting period but will not be paid until a future accounting period
accrued income
Income that has been earned, but not yet received in cash and not yet recorded in the accounts.
(e.g. services provided, but customer hasn’t paid yet).
Represents new information to be recorded in the accounts at balance day as:
- an asset (the right to receive payment)
- as income earned
accrued income also known as (3 more names)
Accrued Revenue, Income Receivable or Revenue Receivable
Prepaid income
Income received in advance, for services that will be provided later.
eg A client pays you in June for tutoring in July — you haven’t earned it yet in June.
Prepaid income also known as (3 more names)
Prepaid Revenue, Unearned Income, Unearned Revenue
accrued expenses
Where an expense has been incurred but has not been paid in cash and is not recorded yet.
Represents new information to be recorded in the accounts at balance day as:
- an expense incurred
- a liability (the obligation to make payment)
prepaid expenses
Where cash has already been paid by the business for an expense it has not yet incurred.
Moved to an expense account when the expense is later incurred:
- Reduce or remove the asset
- Recognise the expense
