Accounting procedures and principles of financial statements

Question 1

what is depreciation?

Answer 1

depreciation is the part of the cost of a non current asset that is consumed during the period in which it is used by the business

Question 2

what type of an account is depreciation

Answer 2

an expense account

Question 3

what are the causes of depreciation

Answer 3

1- wear and tear
2- obsolescense
3- passage of time
4- depletion

Question 4

what is the purpose of accounting for depreciation?

Answer 4

to spread the cost of a non-current asset over its useful life

Question 5

name two accounting concepts applied when charging depreciation?

Answer 5

prudence concept and matching concept

Question 6

explain how charging depreciation is an example of the application of the principle of prudence and matching

Answer 6

prudence concept-
ensures that non current assets are shown at more realistic values
ensures that the profit for the year is not overstated

matching principle-
the cost of the non current asset and the revenues arising from its use are matched in an accounting period
or
the cost of the non current is spread over its useful life

Question 7

what are the depreciable assets?

Answer 7

machinery, motor vehicles, fixtures and fittings

Question 8

it is not usual to charge depreciation on land. Suggest reasons why depreciation should not be charged on land

Answer 8

1- land has an indefinite expected life
2- land does not wear out
3- land is not consumed by use
4- land increases in value overtime

Question 9

what are the depreciation methods?

Answer 9

1- straight line method
2- reducing balance method
3- revaluation method

Question 10

state the type of asset for which the revaluation method of depreciation is suitable

Answer 10

small items of equipment such as loose tools

Question 11

suggest reasons why the straight line method would not be suitable method of depreciation to apply to hand tools used in a factory

Answer 11

1- principle of materiality
2- depreciate each item seperately
3- do not depreciate by an equal amount each
year
4- may be certain amount of loss of tools each
year

Question 12

suggest one reason why the loose tools are revaluated at the end of each financial year rather than by using the straight line method or reducing balance method of depreciation

Answer 12

low value items which are not easy to depreciate separately/ not practical to keep detailed records of such asset

Question 13

what are bad debts?

Answer 13

a bad debt is an amount owing to a business which will not be paid by the credit customer

Question 14

what meant by the term ‘‘bad debt recovery’’

Answer 14

a bad debt recovered is when a credit customer pays some, or all of the debt previously written off as a bad debt

Question 15

suggest ways to reduce the risk of bad debts

Answer 15

1- reduce credit sales and sell on a cash basis
2- obtain references from new credit customers
3- fix a credit limit for each customer
4- introduce/improve credit control
5- issue invoices and monthly statements
promptly
6- refuse further supplies until outstanding
balance is paid
7- give cash discount.
8- charge interest on overdue accounts

Question 16

explain the meaning of the term provision for doubtful debt

Answer 16

a provision for doubtful debt is an estimate of the amount which a business may lose/ be unable to collect in a financial year because of bad debts

Question 17

suggest ways which the amount of a provision for doubtful debts may be determined

Answer 17

1- percentage of the total amount owing by credit
customers
2- estimating which individual credit customers
will not pay their accounts
3- considering the length of time the debts have
been outstanding
4- estimate, based on experience, of amount lost
each year from bad debts

Question 18

state which accounting principles is applied when a business makes provision for doubtful debts

Answer 18

matching concept
prudence concept

Question 19

explain how the principle of prudence has been applied in recording this transaction

Answer 19

creating a provision for doubtful debt ensures that the profit is not overstated

Question 20

explain how a business is applying the accounting principle of accruals by maintaining a provision for doubtful debts

Answer 20

the sales for which a business is unlikely to be paid are regarded as an expense of the year in which those sales are made

Question 21

state the difference between a bad debt and a provision for doubtful debts

Answer 21

a bad debt is an amount owing to a business which will not be paid by a credit customer. a provision for doubtful debts is an estimate of the amount which a business will lose in the financial year because of bad debts

Question 22

state three accounting principles applied to closing inventory

Answer 22

matching concept
prudence concept
realization concept

Question 23

how should inventory be valued?

Answer 23

inventory should be valued either at lower cost, or net realizable value

Question 24

define the term ‘‘cost’’ with regards to the term ‘‘net realizable value’’

Answer 24

cost is the purchase price of the goods plus any additional costs incurred in bringing the inventory to its present condition and position

Question 25

explain the meaning of the term ‘‘net realizable value’’

Answer 25

the estimated receipts from the sale of the inventory less any costs of completing the goods or the costs of selling the goods

Question 26

why should inventory be valued on the lower cost or net realizable value basis?

Answer 26

1- to avoid overstating the current assets
2- to avoid overstating the current assets
3- to apply the principle of prudence

Question 27

state how reducing the value of inventory would be an application of the accounting principle of prudence

Answer 27

it avoids inventory/current assets/profit from being overstated

Question 28

state how reducing the value of inventory would be an application of the accounting principle of prudence

Answer 28

the loss arising from the damage is recorded in the same year as the damage occured

Question 29

what is other receivables/prepaid expenses?

Answer 29

a prepayment is an amount that is paid in advance, where an expense is prepaid it means that a payment has been made during the financial year for some benefit or service to be received in a future accounting period