week 5

• what is the accrual basis of accounting?

  The method of recognizing income and expenses when they occur, not when cash is received or paid.
• Why is the accrual basis internationally recognised?

  It provides a more accurate representation of business performance by matching revenues with expenses in the correct period.
• When is income recognised under the accrual basis?

  Only when it is earned (value-generating activity).
• When is an expense recognised under the accrual basis

  Only when it is incurred (value-sacrificing activity).
• what are the three income recognition scenarios?

  Cash received before income is earned → Deferred Income (Liability).

  Cash received at the same time income is earned → Cash transaction.

  Cash received after income is earned → Credit Sale (Accounts Receivable).
• What are the three expense recognition scenarios?

  Cash paid before the expense is incurred → Prepaid Expense (Asset).

  Cash paid at the same time expense is incurred → Cash transaction.

  Cash paid after expense is incurred → Credit Purchase (Accounts Payable).
• What is depreciation?

  The systematic allocation of an asset’s cost over its useful life as it is consumed.
• Why do businesses record depreciation?

  To match the cost of long-term assets with the periods in which they provide economic benefits.
• What is the formula for straight-line depreciation?

  (Cost - Residual Value) ÷ Useful Life.
• In Classic Transaction 14, how was depreciation calculated for a £6,000 asset with a 5-year life, used for 3 months?

  £6,000 ÷ 5 × (3/12) = £300 depreciation expense.
• What is the depreciable amount?

  The cost of an asset minus its residual value.
• What is useful life?

  The period an asset is expected to be available for use.
• What is residual value?

  The estimated amount an asset will be worth at the end of its useful life
• What is the carrying amount?

  The cost of an asset minus accumulated depreciation
• A machine costs £120,000 and has a residual value of £15,000. What is the depreciable amount?

  £120,000 - £15,000 = £105,000.
• If the machine has a useful life of 4 years, what is the annual depreciation using the straight-line method?

  £105,000 ÷ 4 = £26,250 per year
• If depreciation starts on May 1 and the financial year ends Dec 31, how much depreciation is recorded for the first year?

  (£105,000 ÷ 4) × (8/12) = £17,500.
• What is the carrying amount of the machine after one year of depreciation?

  £120,000 - £17,500 = £102,500
• What are the three main methods of depreciation?

  Straight-line method – constant depreciation expense each year

  Diminishing balance method – decreasing depreciation expense over time.

  Units of production method – based on usage or output.
• Which depreciation method results in the same amount of depreciation expense each year?

  Straight-line method.
• Which depreciation method results in higher depreciation in the earlier years?

  Diminishing balance method.
• Which depreciation method is best suited for assets used at varying rates?

  Units of production method.