Week 6- making adjustments-acc

• What is the purpose of the statement of profit or loss and the statement of financial position?

  Financial reporting
• What are the main components of the statement of financial position?

  Assets, liabilities, capital
• What is the difference between capital expenditure and revenue expenditure?

  Capital expenditure is for long-term assets, revenue expenditure is for short-term expenses
• What are non-current assets?

  Assets used for more than one year
• What is the purpose of depreciation?

  To allocate the cost of a non-current asset over its useful life
• What are the four determinants of depreciation?

  Historical cost, useful life, residual value, method
• What is the straight-line method of depreciation?

  Depreciation expense is the same each year
• What is the formula for the straight-line method of depreciation?

  (Cost - Residual value) / Useful life
• What is the reducing balance method of depreciation?

  Depreciation expense decreases each year based on the asset's written-down value
• What is the formula for the reducing balance method of depreciation?

  Rate x Written-down value
• What is the sum of the years' digits method of depreciation?

  Depreciation expense decreases each year based on the number of years remaining in the asset's useful life
• How would you calculate the depreciation charge for an asset using the straight-line method?

  By dividing the depreciable amount by the useful life
• What is the formula for the sum of the years' digits method of depreciation?

  (Years of remaining useful life / Sum of the years' digits) x Depreciable amount
• How would you calculate the depreciation charge for an asset using the reducing balance method?

  By multiplying the written-down value by the depreciation rate
• How would you calculate the depreciation charge for an asset using the sum of the years' digits method?

  By multiplying the depreciable amount by the years of remaining useful life and dividing by the sum of the years' digits
• What are the ledger entries for annual depreciation?

  Debit depreciation expense, credit provision for depreciation
• What is the purpose of the provision for depreciation account?

  To accumulate the depreciation expense over the asset's useful life
• What are the entries for disposals of non-current assets?

  Debit cash, credit non-current asset; debit provision for depreciation, credit non-current asset; debit non-current asset, credit non-current asset disposals
• What is the purpose of the non-current asset disposals account?

  To record the disposal of a non-current asset and calculate the profit or loss on sale
• How would you calculate the profit or loss on sale of a non-current asset?

  By comparing the proceeds of sale to the written-down value
• What are the key points to remember about non-current assets?

  * Non-current assets are used for more than one year

  * The cost or fair value of a non-current asset is capitalised to the statement of financial position

  * The cost/revalued amount of a non-current asset is allocated against the revenue it generates using depreciation

  * Depreciation can be calculated using the straight-line, reducing balance, or sum of the years' digits methods
• What are current assets?

  Assets that can be converted into cash or near cash in less than one year
• What are examples of current assets?

  Inventories, trade receivables, short-term financial assets, bank and cash
• What is the difference between tangible and intangible non-current assets?

  Tangible non-current assets are physical, while intangible non-current assets are non-physical
• What is goodwill?

  The excess of the purchase price over the fair value of the net assets acquired
• What is development expenditure?

  Expenditure incurred on the development of a new product or process
• How would you account for the disposal of a non-current asset?

  By debiting the non-current asset account and crediting the cash account, and debiting the provision for depreciation account and crediting the non-current asset account
• How would you calculate partial year depreciation?

  By calculating the depreciation expense for the portion of the year the asset was held
• What are the key points to remember about current assets?

  * Current assets are assets that can be converted into cash or near cash in less than one year

  * Examples of current assets include inventories, trade receivables, short-term financial assets, bank and cash
• What are the key points to remember about tangible and intangible non-current assets?

  * Tangible non-current assets are physical, while intangible non-current assets are non-physical

  * Examples of tangible non-current assets include property, plant, and equipment, while examples of intangible non-current assets include goodwill and patents