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BDA - Expenses
UNIT 3 CH 10
| Question | Answer |
|---|---|
| revenues: | inflows of economic benefits (or savings in outflows), in the form of increase in A or reduction in L that lead to incr. in OE *not capital contribution |
| expenses: | outflow/consumption of economic benefits (or reductions in inflows( in the form of decr. in A or incr. in L that lead to a decr. in OE *not drawings |
| why must expenses be recorded when consumed/incurred ? | expense recognised when the economic benefit is consumed, not when the cash is paid |
| profit: | rev earned in current RP less expenses incurred |
| accrual accounting: | calc profit by comparing R earned against E incurred in a particular RP |
| BDA | a change made a to a R or E account on balance day so that R accounts show R earned and E accounts show E incurred in a particular RP __ ensures closing the ledger will not only allow for calc of profit, but profit = accurate |
| purpose of BDA: | ensure that profit can be calculated accurately, by comparing R earned against E incurred in the current RP |
| ABC = | adjust before closing |
| BDA for expenses: | stock losses, prepaid E, accrued E, depreciation |
| how are BDA made? | recorded in GJ before posted to GL |
| if BDA are not made how can profit be inaccurate? | If at balance day there is revenue that has been earned but not yet received, or expenses incurred but not yet paid, then these items may not appear in the revenue and expense accounts. Thus, the calculation of profit would be inaccurate. |
| how BDA ensure relevance in reports: | ensures that IS (and BS) include all info that is useful for decision making, excluding info that is not. _____ Info that would not be useful includes R and E earned or incurred outside the current RP. |
| Explain why a prepaid expense is classified as a current asset. | CA because the economic benefit has not yet been consumed, but instead the future economic benefit will flow to the entity within the next 12 months |
| payment for prepaid E, effect on acc eq. | A-decr.(bank, increase prepaid expense) ___ L-decr (GST Clearing sometimes) ___ OE no effect |
| BDA for consumption of prepaid expense, on acc eq. | A-decr (prepaid bla) ___ L - no effect ___ OE - decr (incr bla E decreases Net profit) |
| Explain why an accrued expense is classified as a current liability. | E incurred but not yet paid is considered to be a present obligation of the entity, as a result of past events, the settlement of which is expected to result in an outflow of economic benefits (when the accrued E is paid) sometime in the next 12 months |
| prepaid E e.g.: | rent, wages, insurance, |
| prepaid E: | an E paid in advance but yet to be consumed |
| where do they go in CPJ? | sundries and GST column when applicable |
| payment of prepaid E effect on acc eq: | A-decr (bank1320, inc prepaid bla 1200) ___ L - decr (GST Clearing) ___ OE - no effect |
| narration for consumption of prepaid E: | adjusting entry to record bla month bla expense incurred (memo x) |
| accrued E: | an E that has been incurred but not yet paid |
| GJ narration for BDA accrued E: | adjusting entry to record bla E consumed but not yet paid (Memo x) |
| accrued E, effect on acc eq: | L-incr, and OE decr |
| when recording payment of E and of accrued E together in CPJ | make sure to split it up, same CHQ and bank total but different 'details' and sundries column or GST etc |
| sundry creditor: | when items other than stock are purchased, but payment has not been made *Creditors control only purchase stock |
| diff btwn accrued. E and sundry creditor: | acc E, relate only to E, items consumed, rather than A. acc E are not due for repayment at balance day, bcuz no invoice has been received. acc E verified by memo. If invoice has been received, transaction = credit transaction,amount owing=sundry creditor |
| adjustments for prepaid E have what effect on A: | decrease A |
| adjustments for accrued E have what effect on L: | increase L |
| what effect does BDA have on cash and net profit? | no effect on cash, but will change NP and items in BS and IS |
| pre- adjustment Trial Balance: | a list of all GL accounts and their balances before BDA have been made |
| post - adjustment Trial Balance: | a list of all GL accounts and their balances after BDA have been made, checks that all debits still equal total credits |
| note BDA effect on E s: | increases all expenses, thus decreasing NP and OE |
| Explain why the payment of an accrued expense in a subsequent period requires the payment to be split in the Cash Payments Journal. | some of the payment is used to reduce the liability for accrued expenses (expense incurred in the last period), and some of the payment is used for the expense incurred and paid in the current period. |
| State the effect on the accounting equation of the payment of an accrued expense in a subsequent period. | A - decr (bank) __ L - decr (acc E, GST clearing) __ OE - Decr (incr Bla exp decr NP) |
| Distinguish between an accrued expense and a sundry creditor. | An acc E occurs when an E has been incurred, but the payment has not yet been made (no invoice has been received). A sundry creditor occurs when items other than stock are purchased, but the payment has not been made (invoice has been received). |
| Explain how a Post-adjustment Trial Balance can assist in the calculation of an accurate profit figure. | ensures that the closing entries and the IS use the correct amounts + adjusted figures for the amounts incurred/earned rather than the unadjusted figures, which do not account for any BDA |
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