The owner of Bread and Stone, a bakery, is puzzled by three figures in her accounts for the year ended 30 September, in which profit is $38,000. Complete th...

(a) Bread worth $210 taken home [4]

The bread was bought by the bakery, so its cost first went into purchases, but it was consumed by the owner and her family rather than sold to customers. Under the business entity concept the bakery and its owner are separate accounting units, so the cost must be taken out of the business's trading figures: credit purchases $210 and debit drawings $210. Cost of sales falls by $210, so the reported profit rises by $210, while drawings rise by the same $210 and capital ends up unchanged. The transfer is made at cost, not at selling price, because no sale has taken place.

(b) The $28,000 offered for the bakery's name [4]

The offer is one buyer's opinion of what the name is worth. No transaction has taken place, so there is no objective money amount that could be verified, and money measurement excludes items that cannot be reliably measured in money terms. Recording it would also take a gain into profit before it has been realised, which prudence forbids. Internally generated goodwill of this kind is therefore never shown; goodwill appears in accounts only when a business has actually been bought and a price paid for it.

(c) The $1,900 order for October delivery [4]

An order is a request, not a sale. Under realisation, revenue is recognised when the goods are delivered and ownership passes, and the bread will not be delivered until October, which falls in the next financial year. At 30 September the bakery has done nothing to earn the money, the hotel could still cancel, and no enforceable debt exists, so no sale and no trade receivable arise.

(d) Profit had the order been treated as a sale [3]

The whole $1,900 falls into profit because no matching cost of sales is recorded, so the overstatement is the full $1,900 rather than a margin. That is why realisation matters commercially as well as technically: taking uncompleted orders as sales would let a business report profit on work it may never do.

Total [15].