Week 5 - Lecture 5

Question 1

what is accrual accounting?

Answer 1

recognizes income when earned and expenses when incurred, not when cash transactions occur

Question 2

when is adjusting entries necessary in accrual accounting?

Answer 2

necessary at the end of an accounting period to ensure that income and expenses are recorded in the period they relate to
- these adjustments are crucial to match income with the expenses incurred to generate that income

Question 3

why are adjustments needed in accrual accounting?

Answer 3

to prevent inaccuracies, such as overstating profits by recognizing cash recieved as income before it is actually earned

Question 4

What is accrued revenue?

Answer 4

• income that has been earned but not yet recieved in cash
• example: if a company earns interest on a term deposit, but the interest is to be paid at a later date, an adjustment is made to recognize this income
• adjustment: increase interest receivable and interest income by the earned amount

Question 5

what is accrued expenses?

Answer 5

• expenses that have been incurred but not yet paid in cash
  -example: if wages are owed to employees at the end of the period but are not due until the next period
• adjustment: increase wages payable (liability) and wages expense (expense)

Question 6

what is unearned revenue?

Answer 6

• cash payments recieved for goods or services to be provided in the future
• example: if a customer pays in advance for goods to be delivered later, the company records it as a liability (unearned revenue) until the goods are delivered
• adjustment: decrease unearned revenue (liability) and recognises sales revenue (income) when the goods are delivered

Question 7

what are prepayments?

Answer 7

• cash payments made for expenses that will be incurred in the future
  - example: prepaid rent, where the company has paid for rent covering several months
  -adjustment: decrease prepaid rent (asset) and recognize rent expense (expense) as it is consumed over time

Question 8

what is depreciation?

Answer 8

• the allocation of the cost of a non-current asset over its useful life
• example: if a company buys a van for $55,000, depreciation is recorded to reflect the wear and tear or usage of the asset over time
  - adjustment: increase depreciation expense (expense) and increase accumulated depreciation (contra-asset)

Question 9

what are contra assets and how do they relate to depreciation?

Answer 9

a contra asset reduces the value of a related asset.
- for example, accumulated depreciation offsets the value of a delivery van on the balance sheet
- depreciation: recorded as an expense to reflect the reduction in the van’s value, while accumulated depreciation is the total depreciation that has been recorded against the asset

Question 10

define profit before tax (PBT) vs profit after tax (PAT)

Answer 10

• profit before tax (PBT): income minus expenses, before considering taxes
• profit after tax (PAT): profit after accounting for taxes

Question 11

define earnings before interest and tax (EBIT)

Answer 11

a measure of profitability that excludes the effects of financing decisions (interest) and taxation, providing a view of the core business performance

Question 12

Define earnings before interest, tax, depreciation and amortisation (EBITDA)

Answer 12

similar to EBIT, but excludes non-cash expenses like depreciation and amortisation, providing a clearer picture of operating performance