Development Of The Accounting Model
Overview
A shopkeeper pays a year's insurance in November. Should the whole payment be an expense of this year, when only two months of cover have been used? A delivery van bought for $40 000 four years ago is still on the road. Is it still worth $40 000? Goods costing $5 000 are now damaged and could only be sold for $3 000 after repairs of $500. What figure goes in the accounts? None of these questions has an answer you can find by looking at a receipt.
They are decided by a set of agreed rules, and this topic is those rules and the entries they produce. You will meet the ten accounting concepts the specification names, learn to separate capital expenditure from revenue expenditure, adjust ledger accounts for amounts owing and prepaid at each end of the year, provide for debts that will never be collected, and account for the wearing out and eventual sale of the assets a business uses to trade.
Objectives
- General accounting concepts used in the preparation of accounting records.
- The use of accounting concepts in a variety of situations.
- The recording of adjustments in ledger accounts.
- Accounting for capital and revenue expenditure and income.
- Accounting for depreciation and disposal of non-current assets.
- Make entries for simple adjustments for other payables and other receivables in ledger accounts and in income statements and statements of financial position. Make entries for irrecoverable debts in the trade receivables ledger and financial statements.
Mind map
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Lesson Note
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Lesson Evaluation
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You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- Which accounting concept requires goods taken by the owner for personal use to be recorded as drawings? A. Business entity B. Going concern C. Materiality D. Realisation Answer: A
- A machine costing $50 000 is depreciated at 20% per annum using the reducing balance method. What is the depreciation charge in the second year? A. $8 000 B. $10 000 C. $18 000 D. $20 000 Answer: A
- Which item is capital expenditure? A. Annual insurance of a delivery vehicle B. Legal fees on the purchase of premises C. Repainting the office D. Wages of the delivery driver Answer: B
- A business owed $400 for wages at the start of the year and $650 at the end of the year. It paid $31 000 in wages during the year. What is the charge to the income statement? A. $29 950 B. $30 750 C. $31 250 D. $32 050 Answer: C
- Which concept requires inventory to be valued at the lower of cost and net realisable value? A. Consistency B. Duality C. Materiality D. Prudence Answer: D
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