4.3 Other payables and other receivables (3)
Resources |
Revision Questions |
Accounting
Login to see all questions
Click on a question to view the answer
1.
Question 2
XYZ Company received £6,000 on 31st December for services to be provided between 1st January and 31st March. Prepare the necessary ledger accounts and journal entries to record the cash received and the revenue earned.
Journal Entry (31st December):
Debit: Cash £6,000
Credit: Deferred Revenue £6,000
Explanation: This entry records the cash received in advance for services yet to be provided. The Cash account is debited, and the Deferred Revenue account is credited. Deferred Revenue is a liability account.
Ledger Accounts:
Debit
Credit
- Revenue Earned (January): £2,000
- Revenue Earned (February): £2,000
- Revenue Earned (March): £2,000
Debit
- £2,000 (Credit from Deferred Revenue - January)
- £2,000 (Credit from Deferred Revenue - February)
- £2,000 (Credit from Deferred Revenue - March)
Credit
2.
Explain why it is important for businesses to match costs with the revenues they generate. Consider the impact on profitability and decision-making.
Matching costs with revenues is a fundamental principle of accrual accounting and is crucial for providing an accurate picture of a business's financial performance. Here's why it's important:
- Accurate Profitability Assessment: Matching ensures that expenses incurred to generate revenue are recognized in the same period as the revenue itself. This provides a more realistic and accurate measure of profitability. Without matching, profits could be artificially inflated or understated.
- Better Decision-Making: Accurate profit figures are essential for informed decision-making. Managers need to know which products or services are most profitable and where costs can be controlled. Matching helps identify these areas.
- Compliance with Accounting Standards: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require matching costs and revenues. This ensures comparability between businesses and across different accounting periods.
- Tax Implications: Profitability, as determined by matching costs and revenues, is a key factor in calculating taxable income. Accurate matching ensures accurate tax reporting.
For example, a company might incur advertising costs in December to generate sales in January. If these advertising costs were not matched with the January revenue, the company's profit would be misrepresented.
3.
A company purchases raw materials for £5,000 in 2023. These materials are then used to manufacture goods that are sold in 2024 for £12,000. Explain how the matching principle should be applied in this situation and what the impact would be on the company's financial statements.
The matching principle requires the company to recognize the cost of the raw materials (£5,000) in the same period as the revenue generated from the sale of the finished goods (£12,000). Since the goods were sold in 2024, the £5,000 cost should be recognized as an expense in 2024.
Impact on Financial Statements:
- Income Statement: The income statement will show a reduction in profit of £5,000 in 2024. The profit would be £12,000 (revenue) - £5,000 (cost of goods sold) = £7,000.
- Balance Sheet: The raw materials would initially be recorded as a non-current asset (stock) on the balance sheet in 2023. As the materials are consumed and become part of the finished goods, the cost is transferred to the cost of goods sold on the income statement.
Failing to apply the matching principle would result in an inaccurate representation of the company's profitability in 2024. It would appear as though the company made a much larger profit than it actually did.