Accounting FIA3

Part A + C

What is a balance day adjustment?

A journal entry made at the end of the reporting period to ensure revenues, expenses, assets and liabilities are recorded in the correct accounting period

Why are balance day adjustments required?

To follow accrual accounting and the matching principle, ensuring accurate profit and financial statements

What is accrual accounting?

Revenue is recorded when earned and expenses when incurred, regardless of when cash is received or paid

What is the matching principle?

When expenses are recognised in the same accounting period as the revenue they helped generate

What are the four balance day adjustments?

prepaid expense, accrued expense, accrued revenue, unearned revenue

How does the balance day adjustment prepaid expenses affect the accounts?

Prepaid expense increases assets and decreases expenses

How does the balance day adjustment accrued expenses affect the accounts?

Increases expenses and increases liabilities

How does the balance day adjustment accrued revenue affect the accounts?

increased assets and increased revenue

How does the balance day adjustment unearned revenue affect the accounts?

decreased liabilites and increased revenue

What is the purpose of the statement of cashflows?

To show the cash received and paid during the reporting period and assess the business’s liquidity

Why is the statement of cashflows important?

It shows whether a business can pay debts, meet day-to-day expenses and fund future operations

Why is profit alone not enough to assess a business’s financial position?

profit is based on accrual accounting, while the statement of cashflows shows the actual cash available to operate the business

What are the 3 sections of a statement of cashflows?

operating activities, investing activities, financing activities

What balance day adjustment is needed when work has been done but money hasn’t been received?

accrued revenue

What balance day adjustment is needed when …is paid early

prepaid expenses

What balance day adjustment is needed when used …. but havent paid

accrued expenses

What balance day adjustment is needed when cash is received but revenue is not earned uet?

unearned revenue

What is the accrual principle?