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Questions and Answers
Which of the following is classified as a non-current asset?
Which of the following is classified as a non-current asset?
- Land and building (correct)
- Debtors/accounts receivable
- Creditors/accounts payable
- Closing stock
How is the net book value of non-current assets determined?
How is the net book value of non-current assets determined?
- Cost minus accumulated depreciation (correct)
- Cost minus liabilities
- Cost plus accumulated depreciation
- Accumulated depreciation divided by cost
Which entry is deducted from debtors/accounts receivable in the balance sheet?
Which entry is deducted from debtors/accounts receivable in the balance sheet?
- Provision for bad debts (correct)
- Closing stock
- Revenue owing
- Cash
What does an increase in the provision for bad debts indicate?
What does an increase in the provision for bad debts indicate?
Which of the following is considered a current liability?
Which of the following is considered a current liability?
In a financial statement, what does equity represent?
In a financial statement, what does equity represent?
Which statement would reduce the equity of a business?
Which statement would reduce the equity of a business?
What type of expense is 'Depreciation' classified as?
What type of expense is 'Depreciation' classified as?
What should be deducted from the total amount paid when accounting for expenses prepaid?
What should be deducted from the total amount paid when accounting for expenses prepaid?
How is bad debt treated in the financial statements?
How is bad debt treated in the financial statements?
What is the treatment of unpaid expenses in the statement of financial position?
What is the treatment of unpaid expenses in the statement of financial position?
When there is an increase in the provision for bad debt, how should it be recorded?
When there is an increase in the provision for bad debt, how should it be recorded?
In the context of depreciation, which method uses the formula: (cost of non-current asset – provision for depreciation) x depreciation rate?
In the context of depreciation, which method uses the formula: (cost of non-current asset – provision for depreciation) x depreciation rate?
What is done with the total depreciation expense for each asset?
What is done with the total depreciation expense for each asset?
In terms of revenue prepaid, how should it be represented in the statement of financial position?
In terms of revenue prepaid, how should it be represented in the statement of financial position?
What adjustment should always be made for revenue owing?
What adjustment should always be made for revenue owing?
How is an expense owing treated in the statement of profit or loss?
How is an expense owing treated in the statement of profit or loss?
What is the consequence of deducting a prepaid portion from the total received for revenue prepaid?
What is the consequence of deducting a prepaid portion from the total received for revenue prepaid?
Flashcards
Closing stock
Closing stock
The value of the unsold goods at the end of a period. It is considered a current asset as it is expected to be sold within the next accounting cycle.
Debtors/Accounts receivable
Debtors/Accounts receivable
Money owed by customers for goods or services already delivered, considered a current asset.
Provision for bad debts
Provision for bad debts
A provision made for customers who may not pay what they owe. It is deducted from debtors to arrive at the net amount expected to be collected.
Creditors/Accounts payable
Creditors/Accounts payable
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Mortgage/Loan/Debenture
Mortgage/Loan/Debenture
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Capital
Capital
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Drawings
Drawings
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Net profit/(loss)
Net profit/(loss)
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Expenses owing
Expenses owing
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Revenue owing
Revenue owing
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Expenses prepaid
Expenses prepaid
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Revenue prepaid
Revenue prepaid
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Bad debt
Bad debt
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Depreciation
Depreciation
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Straight-line depreciation
Straight-line depreciation
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Reducing-balance depreciation
Reducing-balance depreciation
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Sole trader financial statements
Sole trader financial statements
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Study Notes
Financial Statement Preparation
- Adjustments for Owings/Accruals: Expenses owing are added to the amount already paid. Unpaid portions of expenses are treated as current liabilities. Revenue owing is added to the amount already received; outstanding portions are listed as current assets.
Additional Notes
- Always add accruals (AAA) and subtract prepayments when preparing financial statements.
Adjustments for Prepayments
- Expenses prepaid: The prepaid portion is deducted from the total amount paid.
- Revenue prepaid: The prepaid portion is deducted from the total received. Prepaid portions are treated as current assets.
Adjustments for Bad Debt and Provision for Bad Debts
- Bad debt: The bad debt amount is recorded as an expense.
- Provision for bad debt: Calculate the new provision for bad debt (PFBD) based on the information provided. Compare this to the pre-existing PFBD in the trial balance. The full amount of the new PFBD is subtracted from the debtors/accounts receivable balance.
Depreciation Adjustments
- Depreciation: Record as an expense for each asset.
- Increase in PFBD: If the PFBD increases, record the difference in other expenses.
- Decrease in PFBD: If the PFBD decreases, record the difference in other revenue.
Additional Depreciation Notes
- Straight-line depreciation expense = cost of non-current asset $\times$ depreciation rate.
- Reducing balance depreciation expense = (Cost of non-current asset – provision for depreciation) $\times$ depreciation rate.
Financial Statement Example (XYZ Enterprise)
- Statement of Profit or Loss: Presents revenue and expense information to determine net profit or loss. Includes net sales, cost of goods sold, gross profit, other revenue, other expenses and net profit/(loss)
- Statement of Financial Position: Summarises assets, liabilities and equity at a specific point in time. Includes non-current assets, current assets, current liabilities, non-current liabilities and equity.
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