Accounting Concepts, Inventory Valuation & Sale Or Return Basis

Question 1

Business entity

Answer 1

The financial statements refer to a particular business and not those who own or run it

The business is separate from the owners of the business. Treated as two separate parties. (Entity concept)

Question 2

Money measurement

Answer 2

A business monetary should record and report business transactions if it can expressed in terms of money

Focus of accounting transactions is on quantitative data rather than of qualitative data

Examples of items that cannot be recorded as they can’t be expressed as money
- Employee Skill Level
- Employee Working Conditions
- Product durability

Question 3

Duality

Answer 3

Financial transactions have two effects

Debit or Credit

Question 4

Materiality

Answer 4

Some items have such a low value its not worth recording them separately

Question 5

What are accounting concepts

Answer 5

Broad principles that guide preparation of financial statements so that they are relevant, reliable, comparable and understandable

Question 6

Cost

Answer 6

Assets and liabilities are recorded at their respective cash amounts at the time the asset/liabilty was purchased or acquired (historical cost)

Rather than estimating what they are worth. Look at original figure

Question 7

Going concern

Answer 7

A business (to which financial statements relate) is expected to trade for 12 months or more without any threat of liquidation

Question 8

Accruals

Answer 8

Expenses and Income for goods and services are matched to the time period they arose

Question 9

Consistency

Answer 9

Businesses maintain the same accounting policies or principles through the accounting period unless good reason to change it

Question 10

Prudence

Answer 10

Financial statements include a figure that results in profit or value of assets to be lower rather than higher

Question 11

Realisation

Answer 11

Sales and purchases are recorded when ownership of goods changes / services are provided rather than when payment is made

Question 12

Inventory Valuation (PRUDENCE CONCEPT)

Answer 12

• Inventory should be valued lower than cost and NRV
  -> Cost is what was paid for inventory
  -> Net Realisable Value = Selling Price of inventory- Any expenses incurred in getting the good to saleable conrition

Question 13

Sale or Return (REALISATION CONCEPT)

Answer 13

Means the sale of goods from one business to another has not been recognised until the second business has sold the goods to their customers

If goods on “sale or return” have not been sold by the business

-> They should not be included in Sales Revenue or Trade receivables by the first business

-> They should be included in the closing inventory of the first business