L2 - Double Entry Procesing

Question 1

The business entity concept

Answer 1

Individuals who are responsible for keeping financial records and preparing financial statements treat the organisation for which are doing so as though it were a ‘living person’ / independent unit

Question 2

4 Accounting Concepts

Answer 2

The business entity concept

The money measurement concept

The dual aspect concept

The historic cost concept

Question 3

The accounting equation

Answer 3

ASSETS = CAPITAL + LIABILITIES

Question 4

Th Duel aspect concept / duality

Answer 4

Determines that the two aspects must always be equal i.e. What the business entity owns (it’s assets) must be equal to what it owes (it’s capital and liability claims)

That as a ‘living person’ the business it itself capable of owning resources (assets)

Question 5

The Money Measurement Concept

Answer 5

Keeping financial records we are classifying, categorising and recording business events (transactions) to which a monetary value can be attached.

Question 6

The Historic Cost Concept

Answer 6

The book of account are ‘history books’ providing a detailed account of the value at which goods and services are bought and sold.

Question 7

Assets

Answer 7

Items of value to the business

Resources owned by the entity, or amounts owed to it.

Question 8

Non-current assets

Answer 8

Items of value acquired and owned by the business for the specific purpose of being used within the business over a number of accounting periods (years)

e.g.

Business premises 
Plant and machinery 
Fixtures and fittings 
Office machinery and equipment 
Vehicles

Question 9

Current assets

Answer 9

Items of value which are held by the business in the form of liquid funds (cash in hand or cash in a bank current account)

Or which are held in a form that facilitates them being converted by the business into liquid funds at short notice.

e.g.

> Inventory
(Stock of finished goods held for resale, raw materials held for use in the production process, work in progress i.e.partly finished goods awaiting completion)

> Trade receivables
(Amounts due from customers who have been sold goods on credit but not yet settled the amount they owe the business)

> short-term investments
(Money in a bank deposit)

> cash in hand

Question 10

Capital

Answer 10

This is the claim of the owner(s) on the assets of a business after the liabilities have been deducted from the value of its assets.

In accounting for limited companies capital is also referred to as ‘equity’

Question 11

Liabilities

Answer 11

These are the claims of the assets of the business.

i.e. It’s financial obligations, I’m theory all claims on the assets of a business represents a liability.

Claims on assets from the owner is referred to as capital.

Claims of other provider of funds are normally referred to as liabilities.