Concepts Merit/Excellence Flashcards
How does the accounting entity concept get applied to Jo paying home electricity from Jo’s music store?
(Taking an expense out)
The financial affairs of Jo’s Music store are kept separate from the financial affairs of Jo
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. Jo’s personal expenses (Home electricity) are recorded as drawings in the Equity section of the statement of financial position.
How does the accounting entity concept get applied to Jo taking an office computer of Jo’s music store for his daughters use?
(Taking an asset out)
The financial affairs of Jo’s Music store are kept separate from the financial affairs of Jo
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. Jo taking the computer home is now a personal asset and is recorded as drawings in the equity section of the statement of financial position.
How does the accounting entity concept get applied to Jo introducing her personal car into the business?
(Introducing an asset)
The financial affairs of Jo’s Music store are kept separate from the financial affairs of Jo
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. Jo introducing a private car to the business is recorded as an increase in equity- assets introduced. The assets of Jo’s music store increases.
Jo wants to record the excellent service of her business as goodwill. Explain the concept that does not allow this to happen?
The Monetary Measurement concept states that Financial transactions must be measured in a common currency such as NZD 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 Jo’s Music store.
There is a limitation of the financial statements- they do not record non-financial information
Jo imported two piano’s to sell in Jo’s Music Store. They cost $1000 USD each. Explain how the monetary concept is applied to this transaction?
The Monetary Measurement concept states that Financial transactions must be measured in a common currency such as NZD for New Zealand businesses.
Jo’s Music Store would convert the two pianos purchased at $1000 USD each to New Zealand currency
Looking at the Income Statement of Jo’s Music Store, how is the monetary concept applied?
The Monetary Measurement concept states that Financial transactions must be measured in a common currency such as NZD for New Zealand businesses.
Only financial transactions are shown in $ amounts. This is seen by the $ signs on each column of the report of Jo’s Music Store.
Jo’s Music Store’s financial reports are divided into accounting periods. Explain to Jo how the period reporting concept is applied to her business?
The lifetime of Jo’s Music Store is divided into nominated time periods of equal length, usually a year.
This allows Jo and users to make comparisons of financial performance and position of Jo’s Music Store from one period to another. Jo can identify financial trends to assist in decision-making.
E.g. is there enough profit to expand the business.
Jo’s Music store has purchased a computer for $5000. Jo has had 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 the 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 as its historical cost $5000. Users will know for certain what they were purchased for. They can make their own decision on the market value.
What would happen to Jo’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 Jo’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, as the business will close very soon and stop trading – well within a year.
The computer will be valued at $1000 (its market value) not $5000 (its historical cost)
How does recording prepaid insurance $500 in Jo’s Music Store meet the accruals concept?
Prepaid insurance ($500) is recognised when it occurs and is recorded and reported in the financial reports of Jo’s Music Store to 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, Administration expenses, (Insurance) will decrease by $500, this is because it relates to the next accounting period.
Jo’s Music Store is owed dividends of $300 which will be received next financial year. How will the accruals basis be applied to this example?
Dividends owing ($300) is recognised when it occurs and is recorded and reported in the financial reports of Jo’s Music Store to the period to which it relates.
Dividends owing ($300) is recorded as an Accrued Income, increasing a current asset in the statement of financial position.
In the income statement, other income, Dividends received will increase by $300. This is because it relates to this accounting period.
How will Jo’s Music Store deal with shop wages owing $300 using the accruals concept?
Shop wages ($300) is recognised when it occurs and is recorded and reported in the financial reports of Jo’s Music Store to the period to which it relates.
Shop wages $300 is added as a current liability in the statement of financial position, as an accrued expense.
In the income statement, Distribution expenses, (Shop wages) will increase by $300, this is because it relates to this accounting period.
Jo’s Music Store rent part of its store to a piano tuner. The piano tuner has paid $600 rent in advance?
Rent received in advance ($600) is recognised when it occurs and is recorded and reported in the financial reports of Jo’s Music Store to the period to which it relates.
Rent received $300 is added as a current liability in the statement of financial position, as an accrued expense.
In the income statement, Distribution expenses, (Shop wages) will increase by $300, this is because it relates to this accounting period.
