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The Difference Between The Fixed Assets And Current Assets Accounting Essay

The difference between the fixed assets and current assets is that the fixed assets are the assets which are not for resale and last longer compared to current asset, for instance, building, premise, machinery, furniture and etc. Whereas, current assets are the assets, as they are changeable and unstable unlike fixed assets, for instance, cash in bank, cash in hand and etc.

Explain the following concepts:

Business Entity Concept

Accruals Concept

Going Concern Concept

Consistency Concept

Business Entity Concept:

The affairs of a business are to be treated as being quite separate from the non-business activities of its owner or owners. For example, if you own a business and pay yourself a salary from the business, you record these transactions on the financial statements of the business. If on the other hand you invest available funds in another company or buy into a money market account, this is not shown because there is no affect on the financial status of the business.

Accruals Concept:

Accruals concept is concerned with the difference between cash receipts and cash expenditure (actual payments and receipts of money for items) and revenue and expenditure. It states that items should be recorded when used and not when paid for. For example, A business entity may sell goods for $20000 on December 25, 2004 and the payment is not received until January 25, 2005. The sale of goods would result in an increase in the assets (debtors) of the firm of $20000 and increase in the capital by the same amount (of course to be reduced by the cost of the goods sold) although no cash has been received. However, when the Cash is received on January 25, 2005, this would not result in Revenue. It would result in increase in one asset (cash) and a decrease in another asset (debtors). Similarly expenses and cash payments are not the same because a distinction is made between Capital and Revenue Expenditures.

Going Concern Concept:

Going Concern Concept implies that the business will continue to operate for the foreseeable future. For instance, the assumption should not be made when the business is going to close down in the near future, where shortage of cash makes it almost certain that the business will have to cease trading sooner or later and when business have to close down because of shortage of cash. For example, For Example: - where the venture is for a specific purpose like setting up a stall in an exhibition or fair or the construction of a building or bridge etc. under a contract, the business comes to an end on the completion of the project.

Consistency Concept:

Each and every firm should try to choose the methods which give the most reliable picture of the business. This cannot be done of one method is used in one year and another method is used in the next year and so on, in other words, each and every firm must stick to one method. For example, assume that ABC Company Ltd. purchases equipment for $100,000.00 in 20X7. It decides to use the straight-line method of depreciation for that equipment. Two years later, ABC Company Ltd decides that it is more appropriate to use the reducing balance method. Notwithstanding the bases for exemptions from consistency, IAS 1 does not permit ABC to change its method of depreciation for that particular asset. Since it chose the straight-line method for depreciation first, it must stick with it.

State why it is important to differentiate between capital expenditure and revenue expenditure, and briefly explain the accounting treatment of each type of expenditure.

Capital expenditure is made when a firm spends money either to buy fixed assets or to add to the value of an existing fixed assets. Revenue expenditure is not for increasing the value of fixed assets but for running the business on a day-to-day basis. The difference between revenue and capital expenditure can be seen clearly with the total cost of using a motor van for a firm. To buy a motor van is capital expenditure. To pay for petrol to use in the motor van for the next few days is revenue expenditure.

It is important to differentiate between capital expenditure and revenue expenditure because the effect on the final accounts and the profits shown in there, if revenue expenditure is wrongly treated as being capital expenditure, and vice versa. In other words, revenue expenditure which falls under the category of expenses should be accounted in income statement whereas; capital expenditure which falls under fixed assets should be accounted in balance sheet.

Plant and Machinery was purchased on 1st June 2005 for RM 100,000 and estimated disposal value of RM 10,000. Compute the depreciation for the years 2005 and 2006 using the reducing balance taking the rate as 10% method.

Reducing Balance Method:

Year 1: 100000 x 10% x 7/12 = 5833.33 100000 – 5833.33 = 94166.67

Year 2: 94166.67 x 10% = 9416.667 94166.67 – 9416.667 = 84750.003

The frame work for the preparation and presentation of financial statements states that in order to be useful, financial information should meet four objectives. These are:

Relevance

Reliability

Comparability

Understandability

Relevance:

Relevance is one of the factors that must be present in the information for it to be useful. Information that is not relevant is considered as a waste of valuable time in decision making.

Reliability:

Reliability is the right decision based on a set of financial information would also depend on the reliability of the information. In this context, self generated information is considered to be the most reliable as compared to information gather by third parties. The user must be able to depend truthfulness of the information.

Comparability:

Comparability simply means the ability to compare, to bring together financial accounting information for the purpose of noting similarities, difference and to monitor the growth of the business entity. It should be comparable horizontally and dimensionally meaning it should be comparable within the entity and across entities. Comparability is necessary to identify current trends in the market, the growth of the company, the performance, benchmarking and to make accurate predictions about future transactions.

Understandability:

Understandability requires that financial accounting information must facilitate understanding.  Moreover, it should be intelligible and comprehensible to the point that it can be flexible and be understood by not just business executives and stockholders but as well as the general public. It should be presented and expressed in business languages that all data users understand. However, complex business activities make it impossible to reduce the preparation and presentation of financial statements in simplest terms, thus, the conceptual framework assumes that data users have  a reasonable knowledge of business and accountancy.

Identify any five users of accounting information.

Any five users of accounting information could be the customers, bank, Inland Revenue Board (IRB), government and shareholders.

QUESTION 2

You have been supplied with the following balances for Betsy Li, a sole trader, for the year ended 31 December 2009:

RM

Property at cost 140,000

Equipment at cost 70,000

Provision for depreciation at 01/01/09:

Property 4,200

Equipment 17,500

Purchases 385,000

Sales 592,000

Stock at 01/01/09 17,400

Discount allowed 14,000

Discount received 1,900

Returns outward 17,600

Wages and salaries 43,400

Creditors 28,500

Debtors 15,800

Bank overdraft 2,900

Cash in hand 520

Drawings 17,950

Provision for bad debts at 01/01/09 200

General expenses 11,400

Long term loan 20,000

Capital at 01/01/09 30,670

The following adjustments need to be taken into account:

Stock at 31/12/09 is $21,600

Wages and salaries outstanding at 31/12/09 are $4,100

General expenses includes a payment for rates of $1,000

The provision for bad debts needs increasing to $280

Depreciation for the year has still to be provided as follows:

Property 1.5% per year using the straight line method

Equipment 25% per year using the reducing balance method

Loan interest of $2,000 is outstanding

The answer for the questions listed above is written below.

Income Statement for the year ended 31 Dec 2009

RM RM RM

Sales 592,000

less) Cost of goods sold

Opening stock 17,400

Purchases 385,000

less) Return outward (17,600)

Net purchase (367,400)

384,800

less) Closing stock (21,600) (363,200)

Gross profit 228,800

add: Revenue

Discount received 1,900

230,700

less) Expenses

Discount allowed 14,000

Wages and salaries 47,500

General expenses 10,400

Provision for bad debts 80

Property 2,100

Equipment 13,125

Loan 2,000

(89,205)

Net profit 141,495

Required:

Prepare a trial balance for Betsy Li as at 31 December 2009.

Prepare the Income Statement and Balance Sheet for Betsy Li for the period ending 31 December 2009.

Trial Balance as at 31 Dec 2009

Debit (RM) Credit (RM)

Property 140,000

Equipment 70,000

Provision for property 4,200

Provision for equipment 17,500

Purchases 385,000

Sales 592,000

Stock 17,400

Discount allowed 14,000

Discount received 1,900

Returns outward 17,600

Wages and salaries 43,400

Creditors 28,500

Debtors 15,800

Bank overdraft 2,900

Cash in hand 520

Drawings 17,950

Provision for bad debts 200

General expenses 11,400

Long term loan 20,000

Capital 30,670

715,470 715,470

Balance Sheet as at 31 Dec 2009

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