Accounting Basic Theory
1121 theory
Topic 1 BDA/inventory * Time period assumptions: firm would find it desirable to report their financial statements more frequently therefore the economic life could be divided into artificial time periods. * Why are adjusting entries required?
The purpose of balance day adjustment is to recognise revenue and expenses in the relevant Period. * Compare and contrast the purposes of adjusting entries, closing entries and reversing entries
The purpose of closing entry is to transfer profit and loss to owner’s equity account, produce a zero balance in each of the temporary account. P/L summary is another temporary account to which revenue and cost incurred in the period are closed, also it helps avoid excessive details in the capital account.
The purpose of reversing entries : to prevent double counting entries, usually occurs on the first day of the new period on the general journal. * Define term inventory
Held for sale in the ordinary course of business
In the process of production
In the form of materials or supplies to be consumed in the production process or in the rendering service * Trade discount vs settlement discount
Trade discount is a reduction in suggested list price granted to certain customers. Trade discount is not recorded in the accounts but appears as a deduction from the list price shown on the invoice. Settlement discount is an incentive offered to the buyer to induce early payment of an amount outstanding from a credit sale. * What are the disadvantages of the perpetual and period inventory system?
Disadvantages of perpetual inventory systems:
Costly to implement
Huge record keeping
Increased monitoring
False reliability
Disadvantages of periodic inventory systems:
Requires physical stocktake to measure profit
Do not maintain records of inventory movements
Cannot identify stock gain or stock loss * NRV
Is the estimated selling price in the ordinary course of business less the
Topic 1 BDA/inventory * Time period assumptions: firm would find it desirable to report their financial statements more frequently therefore the economic life could be divided into artificial time periods. * Why are adjusting entries required?
The purpose of balance day adjustment is to recognise revenue and expenses in the relevant Period. * Compare and contrast the purposes of adjusting entries, closing entries and reversing entries
The purpose of closing entry is to transfer profit and loss to owner’s equity account, produce a zero balance in each of the temporary account. P/L summary is another temporary account to which revenue and cost incurred in the period are closed, also it helps avoid excessive details in the capital account.
The purpose of reversing entries : to prevent double counting entries, usually occurs on the first day of the new period on the general journal. * Define term inventory
Held for sale in the ordinary course of business
In the process of production
In the form of materials or supplies to be consumed in the production process or in the rendering service * Trade discount vs settlement discount
Trade discount is a reduction in suggested list price granted to certain customers. Trade discount is not recorded in the accounts but appears as a deduction from the list price shown on the invoice. Settlement discount is an incentive offered to the buyer to induce early payment of an amount outstanding from a credit sale. * What are the disadvantages of the perpetual and period inventory system?
Disadvantages of perpetual inventory systems:
Costly to implement
Huge record keeping
Increased monitoring
False reliability
Disadvantages of periodic inventory systems:
Requires physical stocktake to measure profit
Do not maintain records of inventory movements
Cannot identify stock gain or stock loss * NRV
Is the estimated selling price in the ordinary course of business less the