Concepts-Merit Excellence Flashcards
How does the accounting entity concept get applied to Joe paying home electricity from Joe’s music store?
The financial affairs of 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 personal expenses (home electricity)bare recorded as Drawings in the Equity Section of the Statement of Financial Position.
How does the accounting entity concept get applied to Joe taking an office computer of Joe’s music store for his daughter’s 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 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 Joe introducing his personal 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 his private car to the business is recorded as an increase in equity - assets introduced. The assets of Joe’s music store increases.
Joe wants to record the excellent service of his 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 monetary values, backed up with a source document, it will not be recorded in the accounting records for Joe’s music store. This is a limitation of the Financial Statements – they do not record non-financial information.
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. Joe’s music store would convert the two pianos purchased at $1000 USD to New Zealand dollars.
Looking at the income statement for Joe’s music store, how is the monetary concept applied?
Financial transactions must be measured in a common currency such as NZ$ for New Zealand businesses. Only financial transactions are shown in $ amounts. This is seen by $ signs on each column of the report of Joe’s music store.
Joe’s music stores reports are divided into accounting periods. Explain to Joe how the period reporting 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 Joe’s music store from one period to another. Joe can identify financial trends to assist in decision-making e.g is there enough profit to expand the business - Joe’s music store.
Joe’s music store has purchased a computer for $5000. Joe has had the computer revalued at $1000 as it is now quite old. What value will be shown in the financial statements?
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 Joe, particularly Plant Property and Equipment, are valued at the historical cost in the Statement of Financial Position. The computer will be recorded at its historical cost of $5000.
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 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, 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 its historical cost.
How does recording prepaid insurance $500 in Joe’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 Joe’s music store to the period of 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.
Joe’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 Joe’s music store to the period of which it relates. Dividends owing $300 is recorded as 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 Joe’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 Joe’s music store to the period of 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 will increase shop wages by $300. This is because it relates to this accounting period.
Joe’s music store rents 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 Joe’s music store to the period to which it relates. Rent received in advance is an increase in the current liability statement of financial position as income received in advance. In the income statement, other income, rent received will decrease by $600 because it relates to the next accounting period.
