Week 9 Flashcards
Distinction between capital and revenue expenditure
Capital expenditures are long-term investments in assets that will provide benefits over many years
-While revenue expenditures are expenses incurred to maintain existing assets in order to generate revenue in the current period.
Reasons for non-current assets depreciating (falling in value)
Wear and Tear: Over time, non-current assets can deteriorate and wear out due to continuous use, exposure to weather, and other environmental factors. This can lead to a reduction in the asset’s value and its ability to perform its intended function.
Why use The straight-line method
commonly used for calculating depreciation because it’s simple and easy to understand. It spreads out the cost of the asset evenly over its useful life
Why use Reducing balance
Reducing balance is a method of calculating the interest on a loan or credit balance, where the interest is charged on the outstanding balance at the end of each period. The interest charged reduces as the balance is paid off.
Why business might maintain control account
Check on the accuracy
For internal check
Prevention of fraud
Location of errors within the ledgers
Errors of commission
Right side of the account but on the wrong debtors or creditors account. Example, goods sold to B Betty were wrongly entered in B Bunda’s account amount being £450 000
Errors of omission
completely omitted from the books. For example, If we sold £90 goods to J. Brewer but, did not enter it in either the sales account or in Brewer’s personal account, or anywhere else, the trial balance would still ‘balance’.
Errors of principle :
where an item is entered in the wrong class of account, e.g. if purchase of a fixed asset, such as a van, is debited to an expenses account, such as motor expenses account. Example 2: a Computer for office use bought in business for use is entered in the purchases account instead of office equipment account.
Compensating errors :
This is where an error on the debit side of an account has been compensated for by a similar error on the credit side of another account
Error of original entry:
here the original figure is incorrect, yet double entry is correctly done using the incorrect figure. For example, where a sale should have totalled £150 but an error is made in calculating the total on the sales invoice. If it were calculated as £130, and £130 were credited as sales and £130 were debited to the personal account of the customer, the trial balance would still balance.
Complete reversal of entries:
where the correct accounts are used but each item is shown on the wrong side of the account. For example, Suppose we had paid a cheque to D. Williams for £200, the double entry of which should be debit D. Williams £200, credit Bank £200. In error, it is entered as debit Bank £200, credit D. Williams £200. The trial balance totals will still agree.
