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Unit 4 AOS 1/2 (Budgeting (Budgeted financial reports (Cash flow statement…
Unit 4 AOS 1/2
Budgeting
Budgeted reports
- Process of predicting and estimating the financial consequences of future events
- An accounting report that predicts and estimates the financial consequences of future events
Objectives - assists planning by helping to plan the future of the business to see where the business is heading in terms of its performance so possible problems can be managed and opportunities can be taken
Aids decision making by providing a standard by which actual performance can be compared to and thus helps to identify areas where performance is not satisfactory so remedial action can be taken, includes calculating budgeted ratios and indicators
AAs and QCs
Not verifiable as there are no source documents to confirm the accuracy of transactions which have not occurred yet, rather the figures are estimations, but this is useful for decision making and thus is relevant
The business' operations are assumed continuous under going concern so therefore so should the budgeting process
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Budgeted balance sheet
- current assets/liabilities should be examined to evaluate the future working capital of the business and future liquidity
- owners equity and non-current liabilities can be examined to review how the business is being financed and the degree of risk involved
Variance reports
A performance report which allows for the comparison of budgeted and actual reports meaning significant differences can be identified and thus action can be taken
AAs and QCs
Uphold understandability as they allow the owner to easily and quickly see what areas of the business are projects to be favourable or unfavourable in upcoming periods so remedial action can taken and thus is relevant for decision making
Favourable = cash or profit will be higher than budgeted Unfavourable = cash or profit will be lower than budgeted
Bad and doubtful debts
Bad debt - an expense that arises when a debt must be written off as irrecoverable because it has been confirmed that the Account Receivable is unable to pay due to liquidation or bankruptcy
Doubtful debts - a debt that is unlikely to be collected in the future but has not yet been written off as it has bot be confirmed that the Account Receivable is unable to pay
AAs and QCs
If a bad debt occurs in the same period as the credit sale the Income Statement will uphold accrual basis as the expense incurred will be matched against the revenue earned
The amount calculated of doubtful debts will be estimated and therefore not verifiable as there will be no source document to prove its accuracy however it will be less inaccurate than simply reporting Accounts Receivable in full
Estimating doubtful debts ensures that reports provide a more faithful representation of the firms performance and net position and ensures the owner has all the relevant information that may influence decision making
Ethical considerations - omitting the effects of bad debts expense from reports would mean that reports present the firms profit and net position in a more favourable light causing them to be misleading and inaccurate for decision making
Allowance for doubtful debts - the estimated amount of bad debts for a particular period, as they are not confirmed as irrecoverable yet they are not credited against the balance of Accounts Receivable and rather this negative asset is created
Found by = estimated rate x net credit sales
Recorded - DR bad debts CR allowance for doubtful debts
Subsequent period writing off - if the debt is written off in the next period there is no expense recorded and it is deducted straight from Accounts Receivable
Recorded - DR allowance for doubtful debts and GST CR Accounts Receivable
Subsequent period BDA - existing balance in the AFDD will affect the amount of bad debt expense recorded
Found by = doubtful debts (current period) - existing balance (AFDD)
BDAs for expenses
A change made to a revenue or expense account on balance day so that revenue accounts show revenue earned and expenses accounts show expenses incurred for a particular period
AAs and QCs
Going concern allows for the recognition of assets that would produce economic benefits and liabilities that were expected to be settled beyond the current period as the life of the business is assumed infinite
Accrual basis ensures that only revenues earned and expenses incurred within the current period are account for in the calculation of profit
Ensuring that the income statement and balance sheet includes all relevant and accurate information that is capable of making a difference to decision making
Prepaid expenses
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Remaining amount is recorded as a current asset as they are expected to provide future economic benefit on balance day
- Record the payment for the prepaid asset
- At balance day work out how much has been incurred
- Transfer the amount of expense incurred from the prepaid account to the expense account
- Balance and close accounts
Accrued expenses
A current liability that arises when an expense has been incurred in the current period but has not yet been paid for
Represents a present obligation of the business that is expected to be met within the next 12 months
- On balance day work out how much has been incurred and paid for and how much is accrued
- On balance day record the accrued amount
- Balance and close the accounts
- When paying for the accrued expense in the next period, divide payments into a deduction of accrued expenses liability and an increase in expense since balance day
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BDAs for revenues
Unearned revenue - a current liability that arises when cash is received in advance for revenue that is yet to be earned, it owes the g/s to the customer so it presents a present obligation to transfer an economic resource
Recording unearned - DR bank CR unearned revenue
Recording earned - DR unearned revenue CR GST ad revenue
Unearned revenue (deposits) - does not include GST but it does represent unearned revenue as it has been received in advance of the goods being delivered
Recording when received - DR bank CR unearned revenue
Recording when goods are transferred - DR Bank/Accounts Receivable and unearned revenue, CR revenue and GST, DR cost of sales CR inventory
Accrued revenue - a current asset that arises when revenue is earned but not yet received, the amount owing to the business presents a present economic resource which will generate future economic benefit when the cash is received
Recording initially - DR accrued revenue CR revenue
Recording when received - DR bank CR accrued revenue and GST and any additional revenue earned
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