The following transactions and events took place in a business during the year ended 31 December 2024. Transaction / Event 1 The owner paid his daughter's s...

(a) Accounting concepts for each transaction

Transaction 1: The owner paid his daughter's school fees from the business bank account.

Concept: Business entity [1]

The business entity concept states that the business is separate from its owner. The school fees are a personal expense of the owner and should not be recorded as a business expense. [1] They should be recorded as drawings (a deduction from capital), not charged to the income statement. [1]

Transaction 2: Insurance of $2 400 paid on 1 October 2024 for 12 months.

Concept: Accruals / Matching [1]

Only 3 months of insurance (October to December 2024) relate to this accounting year. The expense for the year is $2 400 x 3/12 = $600. [1] The remaining 9 months ($1 800) should be carried forward as a prepayment, shown as a current asset in the statement of financial position. [1]

Transaction 3: An employee was given a 10-year loyalty award but the value of loyalty was not recorded.

Concept: Money measurement [1]

The money measurement concept states that only transactions and events that can be expressed reliably in monetary terms are recorded in the accounts. [1] Employee loyalty cannot be objectively measured in money, so it is not recorded as an asset. [1]

Transaction 4: A customer owing $1 500 is unlikely to pay. The full amount was written off.

Concept: Prudence [1]

The prudence concept requires that losses are recognised as soon as they are anticipated. Since the debt is unlikely to be recovered, it is written off immediately as an irrecoverable debt. [1] This ensures that assets (trade receivables) are not overstated on the statement of financial position. [1]

Transaction 5: Revenue of $8 000 earned in December 2024 but cash not received until January 2025.

Concept: Accruals / Matching (also realisation) [1]

Revenue is recognised when it is earned, not when cash is received. Since the goods were sold or the service was provided in December 2024, the revenue belongs to the year ended 31 December 2024. [1] The $8 000 should be included in revenue for 2024 and shown as a trade receivable (amount owed by the customer) in the statement of financial position. [1]

Transaction 6: The business changed from FIFO to AVCO during the year.

Concept: Consistency [1]

The consistency concept requires that the same accounting methods and policies are applied from one period to the next. Changing the method of inventory valuation mid-year breaks this principle. [1] Consistent application of methods allows meaningful comparison of results between periods and prevents manipulation of reported profits. [1]

(b) Two users of financial statements

Tax authorities / government - they need the information to assess the correct amount of tax payable by the business. [1]

Banks / lenders - they need to assess whether the business can generate sufficient profits and cash flow to repay loans and meet interest payments. [1]