Session 4 (Closing entries)

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which statement regarding the depreciation of fixed assets is correct?

Depreciation applies to both tangible and intangible assets uniformly.

Depreciation is only recognized when the asset is sold.

Depreciation reflects the gradual increase in the value of fixed assets.

Depreciation begins on the first day an asset is utilized. (correct)

What is the primary method used to allocate the cost of tangible assets like plant and equipment over their useful life?

Amortisation

Depreciation (correct)

Expensing

Depletion

Which of the following assets is not subject to depreciation?

Motor vehicles

Furniture and fixtures

Natural resources

Land (correct)

Which term refers specifically to the allocation of the cost of natural resources?

Depletion Signup and view all the answers

Which of the following statements is true regarding intangible assets?

Amortisation applies to both patents and copyrights. Signup and view all the answers

What is the carrying amount (net book value) at the end of year 3 based on straight-line depreciation?

11 000 Signup and view all the answers

Which principle emphasizes that potential gains should not be recorded until they are realized?

Conservatism Principle Signup and view all the answers

In the context of provisions, what is the effect of increasing a provision on profit?

It decreases profit as it is treated as an expense. Signup and view all the answers

What type of assets is covered under provisions for possible losses?

Legal disputes and sales returns Signup and view all the answers

In year 2 of the depreciation table, what is the cumulative depreciation amount recorded?

16 000 Signup and view all the answers

What is the primary purpose of adjusting journal entries in accounting?

To record transactions that have occurred but are not yet recorded according to the accrual method Signup and view all the answers

Which type of adjusting entry involves transactions that are already recorded but not yet earned?

Deferrals Signup and view all the answers

How do accruals relate to the recording of revenues and expenses?

They account for revenues and expenses that have occurred but not yet recorded Signup and view all the answers

In the context of adjusting entries, which of the following best describes 'estimates'?

Entries that record non-cash items such as depreciation and impairments Signup and view all the answers

Which financial statement accounts are commonly impacted by adjusting entries?

At least one Income Statement account and one Balance Sheet account Signup and view all the answers

What factors need to be considered to calculate a depreciation charge for an asset?

Cost of the asset, useful life, residual value, and depreciation method Signup and view all the answers

Using the straight-line method, how much is the annual depreciation for an asset that costs €35,000 with a salvage value of €3,000 and a useful life of 4 years?

€8,000 Signup and view all the answers

What is the net book value of an asset after one year if its gross value is €200,000 and the depreciation expense for the year is €20,000?

€180,000 Signup and view all the answers

Which of the following best describes the depreciable amount of an asset?

The original cost of the asset minus the residual value Signup and view all the answers

What is the correct journal entry for recording the annual depreciation expense for a piece of equipment valued at €35,000 with a depreciation expense of €8,000?

Debit Depreciation Expense €8,000; Credit Accumulated Depreciation €8,000 Signup and view all the answers

Study Notes

Adjusting Entries

Adjusting journal entries record transactions that occurred but weren't initially recorded correctly according to accrual accounting.
These entries are made at the end of an accounting period to comply with matching and revenue recognition principles.
Common types include accruals (revenues and expenses not yet received/paid)
Examples include prepaid expenses and accrued revenues.

Depreciation

Fixed assets lose value over time.
Depreciation represents the consumption of the fixed asset, reflecting its gradual loss of value.
Depreciation begins on the first day of an asset's use.
To calculate depreciation:
- Determine the asset's cost or fair value.
- Calculate the asset's useful life.
- Establish the asset's residual value.
- Select a depreciation method (e.g., straight-line).
Annual Depreciation = (Original Cost - Salvage Value) / Useful Life

Types of Non-Current Assets

Tangible assets: Land, plant and equipment, fixtures, motor vehicles, and natural resources.
Land is not depreciated.
Intangible assets: Goodwill, patents, copyrights, leasehold improvements, and research and development.

Impairment of Assets/Provisions

Based on prudence/conservatism principle, companies must record expected losses but not potential gains.
Asset impairment involves recognizing potential reductions in asset value.
Provisions address potential liabilities with uncertain timing or amounts, like legal disputes or sales returns.
Provision for possible losses addresses other risks of loss in value, such as increased liabilities.
Increasing provisions reduces profit, treated as an expense.
Decreasing provisions increases profit, treated as a revenue.

Straight-Line Depreciation Example

A business buys equipment for €35,000 with a 4-year useful life and €3,000 salvage value.
Annual Depreciation = (€35,000 - €3,000) / 4 = €8,000

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz covers essential concepts in accounting, specifically focusing on adjusting entries and depreciation of fixed assets. You'll learn about accruals, the impact of non-current assets over time, and methods for calculating depreciation. Test your understanding of these fundamental accounting principles.