TOPIC 5 Flashcards
(24 cards)
What are Balance Day Adjustments?
Balance Day Adjustments are entries made on the last day of an accounting period to ensure that financial statements reflect the correct income, expenses, assets, and liabilities for the period.
Why are Balance Day Adjustments necessary?
They are necessary to ensure accurate profit or loss reporting in the Income Statement and to accurately reflect financial position in the Balance Sheet.
What are the types of Balance Day Adjustments?
Accruals (new information), Prepayments (adjustments to existing information).
What are Accruals in accounting?
Accruals involve recording income or expenses that have been earned or incurred but not yet paid or received.
What is Accrued Income?
Income earned but not yet received in cash, recorded as Accounts Receivable and Services Income.
What is Accrued Expenses?
Expenses incurred but not yet paid, recorded as Expenses and Expenses Payable.
What is the journal entry for Accrued Income?
Debit: Accounts Receivable (Asset increase), Credit: Services Income (Income increase).
What happens if Accrued Income is not recorded?
Income and Equity would be understated, affecting the Income Statement and Balance Sheet.
What is Prepaid Income?
Cash received for income that has not yet been earned, recorded as Unearned Income (Liability) until earned.
What is Prepaid Expense?
Cash paid for an expense that has not yet been incurred, recorded as Prepaid Expense (Asset) until incurred.
What is the journal entry for Prepaid Income?
Debit: Unearned Income (Liability decreases), Credit: Income (Income increases).
What is the journal entry for Prepaid Expense?
Debit: Expense (Expense increases), Credit: Prepaid Expense (Asset decreases).
What is Depreciation in accounting?
Depreciation is the allocation of the cost of a non-current asset over its useful life.
What is the Straight Line Depreciation method?
The method allocates an equal amount of depreciation each year based on the asset’s cost minus residual value, divided by the useful life.
What are the consequences of not recording depreciation?
Profit will be overstated, and assets and equity will be overstated.
What is the Allowance for Doubtful Debts?
It is a contra-asset account used to estimate the portion of accounts receivable that may not be collectible.
What is the Direct Write-Off Method for bad debts?
The method recognizes bad debt expense only when an account is deemed uncollectible, removing the receivable from the books.
What is the Allowance Method for bad debts?
The method estimates a portion of accounts receivable as doubtful in the same period income is earned and adjusts the allowance account.
What is the journal entry for an accrued expense?
Debit: Expense (Expense increase), Credit: Expenses Payable (Liability increase).
What is the journal entry when a bad debt is written off?
Debit: Allowance for Doubtful Debts (Negative Asset decreases), Credit: Accounts Receivable (Asset decreases).
What is the Percentage of Receivables method for estimating doubtful debts?
This method applies a percentage to the accounts receivable balance to estimate the doubtful debts allowance.
What is the Percentage of Credit Sales method for estimating doubtful debts?
This method applies a percentage to the credit sales for the period to estimate the doubtful debts allowance.
What is an Accrued Income example?
A business earns $1,500 in interest from a term deposit but has not yet received the payment. The entry would record Accounts Receivable and Interest Income.
What is an example of Prepaid Expense?
A business pays $60 for fuel in advance on June 2, which is recorded as an asset. When the fuel is used up, the entry adjusts the asset and recognizes the expense.
