Accounting concepts Flashcards
characteristics of capital expenditure
- 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
Characteristics of revenue expenditure
- 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
What is depreciation?
- Depreciation is the systematic allocation of the depreciable amount of an asset over the span of its useful life
What is the depreciable amount?
- The depreciable amount is the cost of an asset less its residual value
What is the residual value?
- 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.
Why is PPE depreciated?
- 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
Features of the accounting entity concept
- 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
Accounting entity applied
- 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
Features of the monetary concept
- 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$
Historical Cost Concept
- Assets are recorded at the amount of cash paid or payable at the time of transaction/acquisition
Going Concern
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
Accrual accounting
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
Accrual accounting applied
- 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
Period reporting
- 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
Evidence of Period reporting
title with date
Evidence of monetary concept
$ sign at the top of financial statements
Evidence of going concern
accounts receivable assumes the business will be operating in the next accounting period to collect the income
Evidence of Accrual accounting
Any balance day adjustment as it is matching up income and expenses
Evidence of Historical cost
PPE is recorded at its original cost price
Evidence of Accounting entity concept
Drawings in owner’s equity section
