Week 4 Flashcards
(16 cards)
What is the purpose of the income statement?
To show income and expenses over a period and calculate profit or loss.
What is the formula for income?
Income = Revenue + Gains
Where do we get figures to prepare the income statement?
From the trial balance.
Formula for Gross Profit?
Gross Profit = Revenue – COGS
What is COGS?
The cost of producing or purchasing goods that were sold during the period.
When is revenue recognised under accrual accounting?
When the performance obligation is met and there’s a cash inflow or receivable.
How does revenue recognition relate to the accruals concept?
It’s a specific application — revenue is recorded when earned, not when paid.
What are product costs?
Direct costs tied to producing a product, e.g., raw materials, factory wages.
How are product costs treated in accounts?
If goods are sold → shown in COGS; if unsold → included in inventory.
What are period costs?
Indirect costs like rent and admin expenses that are expensed in the period they occur.
What is an accrual?
An expense used but not yet paid — recorded as a liability.
What is a prepayment?
A paid expense for future use — recorded as an asset.
Why are accruals and prepayments important?
To match expenses to the correct accounting period (accruals concept).
Why do we debit an expense in an accrual entry?
To record the cost that belongs in this year.
Why do we credit the accruals account?
To increase the liability — it shows what we owe.
What does adjusting the opening accrual do?
Removes the part of the liability that related to last year.
