W4- Assets and liabilities

What is annual depreciation?

the depreciation charged each year from using the asset and is reflected under expenses in income statement

what is depreciation?

measure of wear and tear / consumption of an asset

what is the double entry for annual depreciation?

What is accumulated depreciation?

the total depreciation expense from all the years of using the asset

What is the net book value NBV?

Cost (initial price of asset) - accumulated depreciation (consumption to date)

we record NCA at their NBV in the SOFP

What is the formula for straight line depreciation?

(Cost - scrap value) / life of asset

What is the formula for reducing balance depreciation?

% (reducing balance) x NBV (at start of period)

How can you work our the NBV c/fwd?

cost figure - accumulated depreciation to date

What is profit or loss on disposal?

when a NCA is sold we need to calculate P/L on disposal and remove the NCA from SOFP- It goes under expenses in I/S as it isn’t a sale

What is the formula for P/L on disposal?

receipts (money from sale of NCA) - NBV (at time of sale)

How do you know whether to credit or debit the expense when dealing with P/L on disposal?

• if receipts > NBV this is a profit (negative expense) so credit the expense

• if receipts < NBV this is a loss (positive expense) so debit the expense

What are the 2 types of bad debts?

• bad debts- you know the debt will never be recovered

• doubtful debts- uncertain whether debt will be paid back

What should you do with bad debts?

they should be written off so this gets taken off the gross TR figure

What should you do with doubtful debts

create a provision and deduct the doubtful debt provision as a separate line under the gross TR figure to give you the Net TR figure

What is the formula for net trade receivables?

gross TR - doubtful debts

What are the 2 types of doubtful debt provisions?

• specific provision- related to a specific credit customer who may not be able to repay the business for a credit sale)

• general provision- related to all credit customers who owe the business and may be a % of the gross TR figure

What is the double entry for when a bad debt is written off?

What is the double entry for an increase in the doubtful debt provision?

What is the double entry for a decrease in the doubtful debt provision?

What are 4 ways funding can be raised?

through equity (shares) and debt (loans)

What is market price?

the value shareholders will be interested in when selling shares

What is face/nominal value?

minimum value per share when issues as opposed to market value

What is the issued share capital?

the monetary value offered to shareholders which cannot exceed the authorised share capital limit

What happens when a debt is paid in instalments?

part of the payment would be a current liability (amounts due < 1 year) and the rest would be a NCL (due > 1 year)

What is an accrual?

the amount paid for an expense that’s incurred in one period but only paid after that accounting period ends

What is a prepayment?

the amount paid for an expense that is paid before the accounting period that it relates to

Where do we put accruals and prepayments in the SOFP?

• accruals- current liabilities

• prepayments- current assets

What is the double entry for the accruals expenditure (not yet paid but owed)?

we have to recognise as an expense as the cost is incurred in the year but just not paid yet

What is the double entry for when the accruals payment is made in the next period?

accrual would be removed (debited)

What is the double entry for a prepayment?

it is not recognised in the I/S in the period paid as the item wouldn’t have been used yet

What is the double entry for when the prepaid item is used in the next period?

the prepayment would be removed (credited)

What are the formulas for accruals and prepayments when there are b/fwd and c/fwd figures for the income statement?

• accruals = total amount paid in year + c/fwd accruals - b/fwd accruals

• prepayments = total amount paid in year + b/fwd prepayment - c/fwd prepayment