Concepts - Merit-Excellence Flashcards
How does the accounting entity concept get applied to Jo paying home electricity from Jo’s Music Store
- The financial affairs of Jo’s Music Store are kept separate and distinct from the financial affairs of the owner 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. Owner’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 the computer home of Jo’s Music Store for his daughters use.
- The financial affairs of Jo’s Music Store are kept separate and distinct from the financial affairs of the owner 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 car into the business.
- The financial affairs of Jo’s Music Store are kept separate and distinct from the financial affairs of the owner 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 of financial position only Business assets + liabilities are included. Jo introducing a private car into the business is recorded as an increase in equity - Assets introduced. The assets of Jo’s Music Store increase.
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 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 Jo’s Music Store.
- This is a limitation of the Financial Statements – they do not record non-financial information.
Joe imported two piano’s to sell in Joe’s Music Store. Their cost $1,000 USD each. Explain how the monetary concept is applied to this transaction
Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses.
Joe’s Music Store would convert two piano purchased to USD each to New Zealand currency
Looking at the income statement of Joe’s Music Store how, is the monastery appplied
Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses.
Only financial transaction are shown of $ amounts. This is seen in $ signs on each column of the report of Joe’s Music Store
Joe’s Music Stores financial reports are divided into accounting periods. Explain to Joe how the period of reporting concepts is applied to her business
The lifetime of Joe’s Music Store is divided into nominated time periods of equal length, usually a year.
This allows Joe and other users to make comparisons of financial performance and position of a Joe’s Music Store from one period to another. Joe can identify financial trends to assist in decision-making. e.g Expanding the business
Joe’s Music Store purchased a computer for $5,000. Joe has had the computer revalued at $1,000 as it is no quite old. What will be shown on her financial satement
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 Joe’s Music Store, particularly Plant Property and Equipment, are valued at historical cost in the Statement of Financial Position. The computer will be recored $5,000 of its historical costs. Users will know for certain what they were purchased for. They can make their own decisions on their market value.
What could happen to the assets of Joe’s Music Store if the going 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 business 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 $1,000 its market value, not $5,000 its historical value.
How does recording prepaid insurance $500 in Jo’s Music Store meets 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 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, Administrative 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 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 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.
Shop wages owing $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 rents part of its store to a piano tuner. The piano tuner has paid $600 rent in advance
Rent 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 in advance $600 is an increase as a current liability in the Statement of Financial position as income received in advance.
In the Income Statement, Other income, - Rent received will decrease by $600, This is because it relates to the next accounting period.
