Flashcards · 0452 · Topic 4

Accounting procedures flashcards

32 cards on Topic 4, subtopics 4.1 to 4.5. Pick a subtopic or study them all.

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4.1 Capital and revenue expenditure and receipts

Capital expenditure and revenue expenditure: Capital expenditure: buying or improving a non-current asset, including delivery and installation. Revenue expenditure: day-to-day running costs and upkeep, such as repairs, fuel and wages.
Capital receipts and revenue receipts: Capital receipt: not trading income, such as capital or a loan paid in, or the proceeds of selling a non-current asset. Revenue receipt: income from running the business, such as sales or rent received.
Revenue expenditure is treated as capital expenditure. Effect?: Profit is overstated and non-current assets are overstated (less any depreciation charged on the item).
Capital expenditure is treated as revenue expenditure. Effect?: Profit is understated and non-current assets are understated.
A repair of $540 was debited to buildings, depreciated at 10% on cost. Effect on profit and non-current assets?: Depreciation of $54 was charged on it, so both are overstated by 540 − 54 = $486.

4.2 Accounting for depreciation and disposal of non-current assets

Depreciation: The part of a non-current asset’s cost used up in a period through wear and tear, time or becoming out of date. No cash is paid.
Why is depreciation charged?: To match the asset’s cost against the revenue it helps to earn, so profit is not overstated, and so the asset is not shown at more than a realistic value.
Straight-line: cost $54,000, residual value $4,000, life 10 years. Annual charge?: (54,000 − 4,000) ÷ 10 = $5,000 a year, the same each year.
Cost $20,000, 30% reducing balance. Depreciation in year 3, and net book value at the end of year 3?: Y1 6,000 (NBV 14,000); Y2 4,200 (NBV 9,800); Y3 30% × 9,800 = $2,940, NBV $6,860.
Revaluation method: tools valued $1,420 at the start, $380 bought, valued $1,150 at the end. Depreciation?: 1,420 + 380 − 1,150 = $650. Suits loose tools and other small items.
Double entry for the annual depreciation charge: Debit the statement of profit or loss; credit the provision for depreciation account. The asset account stays at cost.
Entries in the disposal account: Debit: the asset’s cost (from the asset account). Credit: its accumulated depreciation (from the provision) and the proceeds (from bank). The balance is the profit or loss, transferred to the statement of profit or loss.
A press cost $22,000, accumulated depreciation $13,200, sold for $9,500. Profit or loss on disposal?: NBV = 22,000 − 13,200 = 8,800. Profit = 9,500 − 8,800 = $700. Compare proceeds with net book value, not cost.

4.3 Other payables and other receivables

Accrued expense: meaning, year-end entry and where it is shown: A cost used in the year but unpaid. Debit the expense, credit Other payables. A current liability.
Prepaid expense: meaning, year-end entry and where it is shown: A cost paid for a later period. Debit Other receivables, credit the expense. A current asset.
Accrued income and income received in advance: Accrued income: earned but not yet received; other receivable (current asset). Income in advance: received but not yet earned; other payable (current liability).
Telephone paid $1,090; $160 owing at the start and $210 owing at the end. Expense for the year?: 1,090 − 160 + 210 = $1,140.
Rates paid $6,300; $900 prepaid at the start and $1,050 prepaid at the end. Expense for the year?: 6,300 + 900 − 1,050 = $6,150.
An accrued expense is left out of the accounts. Effect?: Expenses too low, so profit is too high; liabilities (other payables) are too low.

4.4 Irrecoverable debts and allowance for irrecoverable debts

Irrecoverable debt and allowance for irrecoverable debts: Irrecoverable debt: money due from a named credit customer that will never be paid. Allowance: an estimate of the part of the remaining trade receivables that will probably not be collected.
A customer owing $640 is declared bankrupt. Journal entry?: Debit Irrecoverable debts $640; credit the customer $640.
A debt written off last year is now paid. Entries?: First reinstate it: debit the customer, credit Irrecoverable debts recovered (income). Then record the money: debit Bank, credit the customer.
Trade receivables $18,500 before a $500 write-off; allowance 6%; opening allowance $900. Charge for the year and net receivables?: Allowance 6% × 18,000 = 1,080, an increase of $180 (an expense). Net trade receivables = 18,000 − 1,080 = $16,920.
The allowance falls from $1,400 to $1,150. Effect on profit?: The $250 decrease is income, so profit rises by $250. Only the change goes to the statement of profit or loss.
Which accounting concepts support keeping an allowance for irrecoverable debts?: Prudence (trade receivables are not overstated) and matching / accruals (each year bears its share of the loss).

4.5 Valuation of inventory

The rule for valuing inventory: At the lower of cost and net realisable value, item by item (never comparing grand totals).
Net realisable value (NRV): Expected selling price less the costs still to be paid, such as repairs, repackaging, commission or delivery.
60 lamps cost $34 each. After a $6 repair they sell for $45, with $7 delivery. Value?: NRV = 45 − 6 − 7 = $32, lower than cost. Value 60 × 32 = $1,920 (a write-down of 60 × 2 = $120).
Item A: 30 units, cost $8, NRV $9. Item B: 20 units, cost $15, NRV $11. Inventory value?: A at cost: 240. B at NRV: 220. Total $460. (Comparing totals would wrongly give 490.)
Closing inventory is overstated. Effect this year?: Cost of sales understated; gross profit, profit for the year, equity and the inventory asset all overstated.
Closing inventory was overstated in Year 1 only. Effect in Year 2?: Year 2 opening inventory is too high, so Year 2 gross profit and profit are understated by the same amount. Equity at the end of Year 2 is correct; total profit for the two years is unchanged.
Inventory counted at cost on 4 January: $12,300. Purchases since 31 December $2,150; cost of goods sold since $3,120. Inventory at 31 December?: 12,300 − 2,150 + 3,120 = $13,270. For a count after the year end, subtract purchases and add the cost of goods sold since.