Accounting concepts

Question 1

characteristics of capital expenditure

Answer 1

• does not affect the owner’s equity
• This is a purchase of PPE which is assets
• It includes the improvement of assets
• It includes getting the asset to the right place and initial training
• This tends to be for a one-off expense

Question 2

Characteristics of revenue expenditure

Answer 2

• tends to be an ongoing expense
• incurred in the day to day running of the business
• this would include the repairs, insurance and continual training to use an asset

Question 3

What is depreciation?

Answer 3

• Depreciation is the systematic allocation of the depreciable amount of an asset over the span of its useful life

Question 4

What is the depreciable amount?

Answer 4

• The depreciable amount is the cost of an asset less its residual value

Question 5

What is the residual value?

Answer 5

• The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already in the ages and in the condition expected at the end of its useful life.

Question 6

Why is PPE depreciated?

Answer 6

• To allow the entity to keep a more accurate record of the value of an asset
• Because PPE is recorded on the financial statements using the historical cost - the depreciation deduction is shown on the note to the balance sheet

Question 7

Features of the accounting entity concept

Answer 7

• The economic/financial affairs of the business are kept separate and distinct from the economic/financial affairs of the owner
• It allows us to measure the progress and position of the business which is especially important when the owner owns more than one business

Question 8

Accounting entity applied

Answer 8

• Personal assets should not be included in the financial statements
• Family groceries would be recorded as drawings and the cook’s supplies as a business expense in order to keep the personal assets separate from the business transaction

Question 9

Features of the monetary concept

Answer 9

• All transactions are measured in NZ dollars in the accounting records. The dollar is the common unit of measure. If transactions are made in a foreign currency they are converted to NZD$

Question 10

Historical Cost Concept

Answer 10

• Assets are recorded at the amount of cash paid or payable at the time of transaction/acquisition

Question 11

Going Concern

Answer 11

It is assumed that the entity will continue into the foreseeable future eg accounts receivable indicated that the business assumes it will be operating in the future and receiving money

Question 12

Accrual accounting

Answer 12

The effects of transactions and other events are recognised when they occur and not as cash or its equivalent is received or paid and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate

Question 13

Accrual accounting applied

Answer 13

• Accounts receivable is reported on the balance sheet as a current asset in the period to which the sales relate
• Accrued expenses is where the business is required to record wages owing to the cleaner as a current liability in the balance sheet as this is when the cleaner earned the wages

Question 14

Period reporting

Answer 14

• The entity’s economic activity can be divided into periods of equal length - usually one year in order to provide timely information
• e.g. the balance sheet of XYZ was dated 30 June 2050. This is the balance day of the business and is the end of the accounting period

Question 15

Evidence of Period reporting

Answer 15

title with date

Question 16

Evidence of monetary concept

Answer 16

$ sign at the top of financial statements

Question 17

Evidence of going concern

Answer 17

accounts receivable assumes the business will be operating in the next accounting period to collect the income

Question 18

Evidence of Accrual accounting

Answer 18

Any balance day adjustment as it is matching up income and expenses

Question 19

Evidence of Historical cost

Answer 19

PPE is recorded at its original cost price

Question 20

Evidence of Accounting entity concept

Answer 20

Drawings in owner’s equity section