The affairs of a business are to be treated as being quite separate from the non-business activities of its owner. Example of this concept, if the owner withdraws money from the business account for personal use, it is recorded as drawing. Any injection or reinvestment or profit would be regarded as capital in the accounting context.
Accruals Concept
Concerned with the different between cash receipts and cash expenditure ( actual payments and receipts of money for items )and revenue and expenditure. It states that items should be recorded when used and not when paid for. Example for this concept, if an enterprise sell some goods on credit, the sales is immediately recorded and an asset receivable will be recorded even through the customer has not get paid for the goods. If the goods were delivered on 18 June and the payment was made on 20 June, the sale is deemed to have place on 18 June.
Going Concern Concept
It implies that the business will continue to operate for the foreseeable future
Example: the assumption should not be made are:
If the business is going to close down in the near future
Where shortage of cash makes it almost certain that the business will have to cease trading
Business have to close down because of shortage of case
Example of this concept, where the venture is a specific purpose like setting up a stall in an exhibition or fair or the construction or bridge under a contract, the business comes to an end on the competition of the project.
Consistency concept
Each firm should try to choose the methods which give the most reliable picture of the business.
This cannot be done if one method is used in one year and another is use in the next year and so on
Example of this concept, if a company has adopted for one year method of straight line depreciation and in another year it changes it to written down value method then the profit for those two years can be compared as the change in method of depreciation will affect the profits to a great extend and hence proper conclusion can't be drawn.
Question 1 (c)
State why is important to differentiate between capital expenditure and revenue expenditure, and briefly explain the accounting treatment of each type of expenditure.
Capital Expenditure
Capital expenditure is made when a firm spends money either to:
Buy fixed asset
Add to the value of an existing fixed assert
Include in such amounts should be those spent on:
Acquiring fixed assert
Bringing them into the firm
Legal costs of buying building
Carriage inwards on machinery bought
Any other cost needed to get the fixed assert ready for use
Revenue expenditure
Expenditure which is not for increasing the value of fixed assert, but for running the business on a day-to-day basis, is know as revenue expenditure.
Different between revenue expenditure and capital expenditure
The different between revenue and capital expenditure can be seen clearly with the total cost of using the a motor van for a firm. To buy motor van is capital expenditure. The motor van will be in use for several years and is, therefore, a fixed asset
To pay for petrol to use in the motor van for the next few days is revenue expenditure. This is because the expenditure is used up in a few days and does not add to the value of fixed assets.
The accounting treatment of each type of expenditure:
Revenue expenditure - Expenses - Income statement
Capital expenditure - Fixed asset - Balance sheet
Question 1 (d)
Plant and Machinery was purchased on 1st June 2005 for RM 100000 and estimated disposal value of RM 10000. Compute the depreciations for the years 2005 and 2006 using the reducing balance taking the rate 10% method.
Years 1: 100000 10 % Ã- 7/ 12 = 5833 100000 - 5833 = 94167 ( Reducing Balance )
Years 2 : 94167 Ã- 10 % = 9417 94167- 9417= 84750 (Reducing Balance )
Question 1 (e)
The framework for the preparation and presentation of financial statement states that in order to be useful, financial information should meet four objectives. These are:
Relevance
Reliability
Comparability
Understandability
Relevance
Relevance means that management accounting information applies to certain materials, labor or overheat in the company. This information allow company to determine which cost are direct or indirect, where direct cost relate to ancillary service. Relevance cost relate to the current decision at hand. Management accounting can report several types of information; however information may be unnecessary for a decision.
Reliability
The right decision based on a set of financial information would also depend on the reliability of the information. In this context, self generated information is considered to be the most reliable as compared to information gather by third parties. The user must be able to depend on the truthfulness of thee information.
Comparability
Consideration in decision making, in addition to the quantitative or financial factor highlighted by Incremental Analysis. They are factor relevant to a decision that are difficult to measure in terms of money.
Understandability
The implies the expression with clarity, of accounting information in such a way that it will be understandable to users who are generally assumed to have a reasonable knowledge of business and economic activities.
Question 1 ( f )
Identifying any five user of accounting information
Bank
Capital
Creditor
Government
Shareholder
Question 2
You have been supplied with the following balances for Betsy Li, a sole trader, for the year ended 31 December 2009:
RM
Property at cost
140000
Equipment at cost
70000
Provision for deprecation at 01/01/09
Property
4200
Equipment
17500
Purchases
385000
Sales
592000
Stock at 01/01/09
17400
Discount allowed
14000
Discount received
1900
Returns outward
17600
Wages and salaries
43400
Creditors
28500
Debtors
15800
Bank overdraft
2900
Cash in hand
520
Drawing
17950
Provision for bad depts. at 01/01/09
200
General expenses
11400
Long term loan
20000
Capital at 01/01/09
30670
The following adjustments need o be taken into account:
Stock at 31/12/09 is RM 21600
Wages and salaries outstanding at31/12/09 are RM 4100
General expenses include a prepayment for rates of RM 1000
The provision for bad debts needs increasing to RM 280
Depreciation for the year has still to be provided as follow:
Property 1.5% per year using the straight line method
Equipment 25% per year using the reducing balance method
Loan interest of RM 2000 is outstanding
Required :
Prepare a trial balance for Betsy Li as at 31 December 2009
Prepare the Income and Balance Sheet for Betsy Li for the period ending 31 December 2009.
(A)
Betsy Li
Trial balance as at 31 December 2009
Debit
Credit
Property at cost
140000
Equipment at cost
70000
Provision for deprecation at 01/01/09
Property
4200
Equipment
17500
Purchases
385000
Sales
592000
Stock at 01/01/09
17400
Discount allowed
14000
Discount received
1900
Returns outward
17600
Wages and salaries
43400
Creditors
28500
Debtors
15800
Bank overdraft
2900
Cash in hand
520
Drawing
17950
Provision for bad depts. at 01/01/09
200
General expenses
11400
Long term loan
20000
Capital at 01/01/09
30670
Total
715470
715470
( B(i) ) Betsy Li
Income statement for the year ended 31 December 2009
RM
RM
RM
Sales
592000
less) cost of good sales
Opening stock
17400
Purchases
385000
less)Return outwards
(17600)
367400
384000
less) closing stock
(21600)
363200
Gross profit
228800
other income
Discount received
1900
230700
Expenses
Discount allowed
14000
Wages & salaries ( 43400+4100)
47500
Increase provision for bad debt
80
General expenses( 11400-1000)
10400
Depreciation of property (w1)
2100
Depreciation of equipment (w2)
13125
Loan interest
2000
89205
Net profit
141495
Working 1 Working 2
Depreciation of property Depreciation of equipment
1.5 % Ã- 140000 = 2100 70000 - 17500 = 52500
52500 Ã- 25 % = 13125
( B(ii) ) Betsy Li
Balance sheet as at 31 December 2009
At Cost
Accumulated Depreciation
Net Book Value
RM
RM
RM
Non- Current Asset
Property
140000
6300
133700
Equipment
70000
30625
39375
Current Asserts
Stock at 31/12/09
21600
Debtors
15800
Provision for bad debts
(280)
15520
Cash in hand
520
General expenses prepayment
1000
38640
Current Liabilities
Creditors
28500
Bank overdraft
2900
Wages & salaries outstanding
4100
Loan interest outstanding
2000
(37500)
Working capital
1140
174215
Finance by:
Capital
30670
Net profit
141495
172165
less) Drawing
(17950)
154215
Non-current liabilities
long term loan
20000
174215
