Free Financial Accounting 2 (Intermediate) Revision

The main objective is to provide useful information about a business’s financial position, performance, and cash flows to help users make informed economic decisions.

Capital expenditure refers to money spent to acquire or improve long-term assets ( E.g., buying machinery), whereas Revenue expenditure refers to money spent on day-to-day operations(E.g, paying rent)

Adjusting entries are made at the end of an accounting period to update accounts before financial statements are prepared.
They ensure that revenues and expenses are recorded in the correct period (accrual concept).
Examples include:
• Accrued expenses (e.g., unpaid rent)
• Prepaid expenses (e.g., insurance paid in advance)
• Depreciation charges

Depreciation is the allocation of the cost of a fixed asset over its useful life.
It’s important because:
• It shows the reduction in the asset’s value.
• It matches the asset’s cost with the revenue it generates.
• It ensures accurate financial reporting.

i. Straight-line method- equal amount each year.
ii. Reducing balance method-higher depreciation in early years.
iii. Units of production method-based on usage or output.

Accruals refer to expenses incurred but not yet paid, or income earned but not yet received (E.g., Outstanding rent and accrued interest income), whereas prepayments refer to payments made in advance for future expenses(E.g., prepaid rent).

A trial balance is a list of all ledger accounts and their balances at a specific date.It’s used to check the mathematical accuracy of the books before preparing financial statements.

A suspense account is a temporary account used when there are uncertainties or errors in the books that need to be resolved later.
Once the errors are corrected, the suspense account should have a zero balance.

Control accounts summarize transactions in subsidiary ledgers (like debtors and creditors).
They are used to:
i. Check the accuracy of ledger postings.
ii. Detect errors quickly.
iii. Provide totals for financial statements.

It allows for possible future losses from customers who may not pay.
This ensures that assets are not overstated and income is reported accurately