Week 5- Profit or Loss: Adjustments

Question 1

Describe the credit/debit situation in terms of assets

Answer 1

Debits increase

credits decrease

Question 2

Describe the credit/debit situation in terms of liabilities

Answer 2

Decrease in debits

increase in credits

Question 3

Describe the credit/debit situation in terms of expenses

Answer 3

Increase debits or decrease credits

Question 4

Describe the credit/debit situation in terms of income

Answer 4

increases credits and decreases credits

Question 5

what are the three main aspects regarding adjustments?

Answer 5

Depreciation, bad debts (and provision for doubtful debts) and income and expenses which are pre-paid or accrued

Question 6

what is the period of time called that a business uses an asset for?

Answer 6

the assets useful life

Question 7

why must an asset be expensed over its useful life?

Answer 7

Because this is the cost of having the asset and becomes part of the cost of generating the income over a financial year

Question 8

what is the definition of depreciation?

Answer 8

The systematic allocation of the cost of an asset over its useful life

Question 9

what is the cost price of an asset?

Answer 9

what was paid for the asset

Question 10

what is accumulated depreciation?

Answer 10

the total of all depreciation on that particular asset to date

Question 11

what is the carrying amount of a asset?

Answer 11

Cost price minus accumulated depreciation

Question 12

what is the residual value of the asset?

Answer 12

how much the asset is expected to be sold for at the end of its useful life

Question 13

what is the depreciable amount of the asset?

Answer 13

cost price minus residual value (the amount which will actually be depreciated)

Question 14

what is the depreciable amount of the asset?

Answer 14

cost price minus residual value (the amount which will actually be depreciated)

Question 15

what are the two accounts that are affected when we calculate depreciation

Answer 15

Depreciation (expense) on the SoPL which increases on the debit side

Accumulated depreciation on the SoFP increases on the credit side

Question 16

Is accumulated depreciation a negative or positive asset in the SoFP?

Answer 16

Negative, it reduces the recorded value of the asset

Question 17

what are the two methods for working out depreciation?

Answer 17

Straight-line method and the diminishing balance method

Question 18

describe how you calculate the straight-line method of depreciation?

Answer 18

Cost price - residual value ( How much the asset is expected to be sold for) divided by the number of years in its useful life.

Question 19

describe how you calculate the diminishing balance method?

Answer 19

Cost price - accumulated depreciation x percentage. This means that the depreciation to be expensed every year declines

Question 20

what influences the choice over which depreciation method you use?

Answer 20

Will the asset be evenly generating income over the period? Will it have higher productivity initially?

Question 21

do you use the same method of depreciation for all assets in a category?

Answer 21

Yes eg. equipment

Question 22

What are debts called that we won’t be getting any money back from?

Answer 22

Bad debts

Question 23

where are bad debts initially recorded?

Answer 23

under trade receivables

Question 24

describe the two entries we would have to make on our financial statements when adjusting for bad debts

Answer 24

Increase bad debts (exp) on the SoPL (DR) and reduce receivables (SoFP) (Cr)

Question 25

what is the account called for debts that are unlikely to be paid?

Answer 25

Provision for doubtful debts

Question 26

are transactions that have been charged at a discounted price recorded with the discount or at the original price?

Answer 26

At the discounted price

Question 27

Do we keep expenses that we have paid for but relate to future financial years in our financial statements?

Answer 27

No. The accounts should move as such: Expenses decrease (Cr) and expenses prepaid (CA) will increase (DR)

Question 28

Do we keep expenses we have not paid for but that relate to future financial years in our financial statements?

Answer 28

Yes. The accounts should move as such: Expenses increase (Dr) and expenses accrued (CL) will increase

Question 29

Should income that we have received prior to the financial year it relates to be kept in the financial statement for that year?

Answer 29

Yes. The accounts should move as such: Income must decrease (DR) and income received in advance (CL) should increase (Cr)

Question 30

Should income that we have not received yet be recorded in the financial statements?

Answer 30

Yes. The accounts should move as such: Income should increase (Cr) and income accrued (CA) should increase (DR)