Concepts Merit and Excellent Flashcards
How does the entity concept get applied to Joe paying home electricity from Joe’s music store.
The financial affairs of the Joe’s music store are kept separate and distinct from the financial affairs of the owner,Joe.
When preparing accounting records of a business we only include the business transactions and exclude those of the owner.
When preparing the Income Statement only Business income and expenses are included. Owner’s expenses, home electricity is recorded as Drawings in the Equity Section of the Statement of Financial Position
How does the entity concept get applied to Joe taking an office computer of Joe’s music store for his daughters use.
The financial affairs of the Joe’s music store are kept separate and distinct from the financial affairs of the owner,Joe.
When preparing accounting records of a business we only include the business transactions and exclude those of the owner.
When preparing the Statement of Financial Position only Business assets and liabilities are included. Joe taking the computer home makes it a personal asset which is recorded as Drawings in the Equity section of the Statement of Financial Position.
How does the entity concept get applied to Joe introducing his car into the business
The financial affairs of the Joe’s music store are kept separate and distinct from the financial affairs of the owner,Joe.
When preparing accounting records of a business we only include the business transactions and exclude those of the owner.
When preparing the Statement of Financial Position only Business assets and liabilities are included. Joe introducing a private car into the business is record as an an increase in the Equity( more assets) section of the Statement of Financial Position.
Joe wants to record the excellent service of his business as goodwill. Explain the concept that does not allow her to do this.
The monetary measurement concept states that Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses.
Therefore goodwill for excellent service cannot be expressed in money values, backed up with a source document, it will not be recorded in the accounting records of Joe’s music store.
Joe imported two pianos to sell in Joe’s music store. They cost $1000 USD each, explain how the monetary concept is applied to this transaction.
Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses.
Therefore if a transaction is not in the common currency the transaction must be converted in NZD). Joe’s music store would convert the two pianos purchased at
$1000 USD each to NZD $1170 each.
This is a limitation of the Financial Statements – they do not record non-financial information.
Looking at the income statement of Joe’s music store how is the monetary concept applied.
Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses.
Therefore all numerical values must be in the same common currency for Joe’s music store’s income statement.
Joe’s music store’s financial statements are divided into accounting periods. Explain to Joe how the reporting period concept is applied to his business.
The lifetime of the business is divided into nominated time periods of equal length, usually a year.
This allows Joe to make comparisons of financial performance and position of a business from one period to another. Joe can identify financial trends to assist in decision-making for example to decide if there is enough profit to expand the business - Jo’s Music Store
Joe’s music store has purchased a computer for 5000. Joe has has the computer revalued at 1000 as it is now quite old.What value will be shown in the financial statement.
The financial reports are prepared on the assumption that the life of the business is expected to continue to operate into the foreseeable future.
Hence assets of Jo’s Music Store, particularly Plant Property and Equipment, are valued at historical cost in the Statement of Financial Position. The computer will be recorded at its historical cost, 5000.
Buyers will know for certain what they were purchased for. They can make their own decisions on their market value.
What would happen to the assets of Joe’s music store if the going concern concept did not apply
The financial reports are prepared on the assumption that the life of the business is expected to continue to operate into the foreseeable future.
If the Joe’s music store is not a Going Concern then the Historical Cost Concept does not apply. Assets must be valued at Market Value. All the assets will all be classified as Current Assets. There will be no Non-Current Assets, Joe’s music store will close very soon and stop trading – well within a year.
The computer will be valued at $1000 not 5000 its historic cost.
How does recording prepaid insurance of $500 in Joe’s music store meet the accrual basis.
Prepaid insurance ($500) is recognised when it occurs and is recorded and reported in the financial reports of the period to which it relates.
Prepaid insurance ($500) is added as a current asset in the statement of financial position.
In the income statement under administrative expenses-insurance will decrease by $500. This is because it relates to the next accounting period.
Joe’s music store is owed dividends of $300 which will be received the next financial year. How will the accrual basis be applied to this example.
The dividends are recognised when they occur and are recorded and reported in the financial reports of the period to which they relate.
Dividends owing $300 is recorded as an accrued income increasing a current asset in the statement of financial position.
In the income statement the other income called dividends received will increase by $300 dollars.
This is because it relates to this accounting period
