U4A1 - Extension of Recording and Reporting

transaction types that need bdas

• revenues earned but not yet received

• revenues received but not earned

• expenses incurred but not paid

• expenses paid but not yet incurred

balance day adjustments

a change made to a revenue or expense account on balance day so that revenue accounts show revenues earned and expense accounts show expenses incurred

what do balance day adjustments ensure

• allocated revenues and expenses in the period in which they are earned or incurred regardless of when they are paid or received

• revenues earned and expenses incurred are matched to accurately determine profit

balance day adjustments QCs and Assumptions

• accrual - matching r and e

• going concern - assuming business life is ongoing so we can recognise r and e earned and incurred but not yet received or paid

• period

• relevance

assets

a present economic resource controlled by the entity as a result of past events that can provide future economic benefit and have not yet been consumed

expenses

decrease in assets or increases in liabilities that result in a decrease in owners equity other than those relating to drawings of the owner, consumption of economic benefit

depreciation

the allocation of the cost of a NCA over its useful life

depreication expense

the part of the cost of a NCA that has been consumed, incurred in the current period

accumulated depreciation

the value of a NCA that has been consumed or incurred over its useful life thus far

purpose of depreciation

• to ensure an accurate profit is determined by calculating the expense that is incurred in the current reporting period relating to NCAs, accrual

• ensures income statement upholds relevance

• ensures balance sheet will show a more relevant valuation of NCA

straight line depreciation

a method of depreciation that allocates the same amount of depreciation every reporting period, regardless of the age of the asset

what does straight line depreciaiton assume

that the NCA contributes evenly to the revenue earnings of the business over it’s useful life and therefore depreciation expense allocated will be the same amount every period

straight line depreciation formula

historical cost less residual value divided by useful life

residual value

• the estimated value of the nca at the end of its useful life

• residual value isnt going to be used by the business in earning revenue, it represents a potential inflow of future economic benefit at the end of the asset’s life

• this portion of the asset will be used up by someone else once the asset has been sold

useful life

the estimated period of time which a nca will be used by the current entity to earn revenue, dependent on on however long we would use it

historical cost

the original purchase price of the nca

depreication rate formula

depreciation expense / historical cost times 100

why not reporting depreciation is unethical

• relevance - if depreciation is omitted important info is excluded, financial reports become less useful and stakeholders may make decisions based on incomplete information

if depreciaiton is omitted in income statement

• expenses understated

• net profit overstated

• may lead to poor decisions about profitability and expense control

if depreciation is omitted in the balance sheet

• nca overstated

• oe overstated

• may lead to poor decisions about asset replacement and business value

cost of a nca

all costs incurred in order to bring the asset into a location and condition ready for use which will provide a benefit for the life of the asset

ways an owner may purchase an nca

cash, take out loan

carrying value

the value of a nca that is yet to be consumed/allocated as an expense plus any residual value

reducing balance method

assumes that the asset will contribute more to revenue at the start of its life when it is new, efficient and productive

assets that should use reducing balance

• more efficient in earlier years of life like equipment, photocopier, vehicle

• moving parts

• expected to face technological obsolescence relatively quickly

how to select a depreciation method - QCs

• business can choose different methods for different assets as its the asset itself and how it contributes to revenue that determines which method is used

• comparability, but it can be changed if changing to something that’s more correct because relevance and faithful rep trump comparability being breeched

how to choose a depreciation method - ethics

• choosing a method so firm’s performance is presented in a particular light is unethical as it’s not impartial or objective

• it will compromise ability of reports to provide a faithful rep of performance and position as its a result of bias

• therefore method should best reflect the revenue earning pattern of the asset as it will provide the best matching of revenues earned and expenses incurred and therefore the most accurate calculation of profit under accrual

steps to record disposal of nca

• historical value

• accumulated depreciation

• what you sold it for with gst

• if you lost or gained

loss on disposal of asset

occurs when proceeds from disposal of asset is less than carrying value

profit on disposal

when proceeds from disposal of asset are greater than carrying value

proceeds on the sale of a nca

• how much the business receives in the form of cash or the value of the trade in

• based on a source doc and are in line with verifiability, indicating that the carrying value was in some way incorrect

reasons for loss on disposal

asset was over valued or overstated in accounting records, underdepreciation

under depreciation

occurs when insufficient depreciation has been allocated over the life of the asset due overstating residual value or useful life resulting in an overstatement of the asset’s carrying value

reasons why useful life or residual value were overestimated (under depreciation)

• original estimates didn’t anticipate that the asset would be damaged

• original estimates didn’t anticipate the asset would be outdated or superseded by a newer, technologically superior model

reasons for profit on disposal

over depreciation

over depreciation

occurs when excess depreciation expense has been allocated over the life of the NCA due to understating its residual value and or useful life resulting in an understatement of the asset’s carrying value

reasons why residual value or useful life were understated

• original estimates didn’t anticipate that the asset would be in good condition

• original estimates didn’t anticipate the asset would be in high demand