The Cash And Accrual Basic Are The Two Methods Of Accounting Accounting Essay

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Fixed assets also known as a non-current asset or as property, plant and equipment (PP & E) is a term used in accounting for assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases, only tangible assets are referred to as fixed.

Answer Question B

Current assets

In accounting, a current asset is an asset on the balance sheet which can either be converted to cash or used to pay current liabilities within 12 months. Typical currents assets include cash, cash equivalents, short term investments, accounts receivable, inventory and the portion of prepaid liabilities which will be paid within a year. On a balance sheet, assets will typically be classified into current assets and long-term assets. The current ratio is calculated by dividing total current assets by total current liabilities. It is frequently used as an indicator of a company`s liquidity, its ability to meet short term obligations.

Business Entity Concept

In accounting, the separate entity concept treats business a distinct and separate from it owners. The business stands apart from other organizations as a separate economic unit. It is necessary to record the business`s transaction separately, to distinguish them from the owner`s personal transactions. This concept can be extended to accounting separately for the various divisions of a business in order to ascertain the financial results for each division. The idea here is that the financial transactions of one individual must be kept separate from any unrelated financial transactions of those same individuals or group.

Accruals Concept

The cash and accrual basic are the two methods of accounting. The difference between the two methods the two methods is how and when sales revenues and expenses are recognized. The cash basic of accounting recognizes sales revenue inflows when cash is received and expense outflows to generate revenue when cash is paid. Simply put, the cash basic recognizes revenue and expenses only when cash changes hands. The accrual basis of accounting recognizes inflows of sales revenues when earned, and expense outflows to produce sales revenues when incurred; it does not matter when cash is received or paid. Many small operations use the cash basic of accounting when appropriate for their type of business; no requirement to prepare and report their financial position to external users exists.

Going Concern Concept

One fundamental concept of GAAP is the 'going concern' concept, also known as the 'going concern assumption. The term 'concern' is derived from the early-20th century and it means a business or enterprise. The 'going concern' assumption developed from a desire to produce financial statement that accurately reflected the financial performance of a business over shorter time periods. The 'going concern' concern assumption help accountants apportion cost/revenues to financial transactions that cover multiple reporting period.

Consistency Concept

Consistency is a concept used when applying accounting methods to a business, the business must continue to use the particular method. For an example if a company is charging depreciation using the straight line method, they must stick with the straight line method. According the concept, whatever accounting practices (whether logic or not) are selected for a given category of transactions, they should be followed from one accounting period to another to achieve compatibility for example : If depreciation is charged according to a particular method it should be followed year after year for the purpose of comparisons.

Answer Question 1 C

The differentiate between Capital expenditure and Revenue expenditure

Accounting fraud occur because management choose to classify should be revenue expenditure as capital expenditure. They should be revenue expenditure should be taken up into the Income Statement but instead now being suspended or deferred into the balance sheet. In this process, lesser expenses are being. In the process, lesser expenses are being charge into the Income Statement. Strong GAAP and Accounting standards have classified what should be assets, what should be deferred in the balance sheet so that there should be a clearer demarcation between capital and Revenue expenditure.

Accounting treatment of Capital expenditure and Revenue expenditure

Accounting treatment for capital expenditure can be difficult, involving many accounts and journal entries. Once an item is capitalized, it is kept separately from other expenses in the accounting records. It is also reported in a different manner. Capitalized items are usually kept in the books for longer than a year, with backup paper files containing invoices and other information kept separately from regular expenses. In some cases, the benefit of revenue expenditure may be available for period of two or three or even more years. Such expenditure is then known as "Revenue Expenditure" and is written off over a period of few years and not wholly in the year in which it is incurred. For example, a new firm may advertise very heavily in the beginning to capture a position in the market. The benefit of this advertising campaign will last quite a few years. It will be better to write off the expenditure in three or four and not in the first year.

Answer Question D

Year 1 100 000 X 1070 X 7/12 = 5833 100 000 - 5833 = 94167

Year 2 94167 X 1070 = 9417 94167 - 9417 = 84750

Answer Question E


Relevance is one of the four key qualitative characteristics of financial accounting information. The others being understandability and comparability. Relevance requires that users need it and it is expected to affect their decisions. Relevance is both critical for the quality of the financial information, but both are related such that emphasize on one will hurt the other and vice versa. Hence, we have to trade-off between them. But if we wait to gain while the information gains reliability, its relevance is lost.


The concept of reliability or dependability is used in a variety of business and industrial settings. In general, the concept of reliability is applied where it is important to achieve the same results again and again. A manufacturing process is said to reliable when it achieves the same results, within defines limits, each time it occurs. An automobile, or other type of product is reliable if it performs consistently and up to expectations. The reliability of financial and other types of data may depend on how they have been compiled and prepared. Personnel are considered reliable when they perform consistently and are able to achieve define objectives.


Comparability is on the of key qualities which accounting must have. Comparable accounting information is useful because it tells us the story of the business so we can compare it with prior periods and with other companies in industry, the country, the region or even the whole world. Comparability is achieved by applying the GAAP (such as US GAAP such as IFRS) and by being consistent in such application. GAAP intended to outline the best accounting treatment so that companies follow them and hence accounting information is understandable, relevant, reliable and comparable. Consistency means that the accounting policies should be changed only when there are valid grounds for such a change.


The third characteristic understandability requires financial information to be prepared in such a way that it may be understood. This means the balance sheet, the income statement of cash flows and the movements in equity are prepared in accordance to GAAP. Furthermore they must be prepared so that it may be understood by ALL users of financial statements (investors, employees, suppliers, customers).

Answer Question F

Internal and external stakeholder

Accounting information is a useful tool for individual reviewing small business operations. Financial statements are the most common accounting reports used to measure a company's performance. Several types of users review small-business financial statements. Accounting information users can be internal or external business stakeholders. Business stakeholder is a term that indicates an individual is invested personally or financially in an organization.

Business owners

Business owners are perhaps the most important user of a small business` accounting information. Business owners review financial statements to determine how much profit the business has made during a certain time period. Then income statement includes information on the company's revenue sales, cost of goods sold and expenses. The final result of this report is net income. Business owners are interested in the company's net income since it represents the amount of capital generated from business operations.


Employees are the individuals who transform economic resources into valuable consumer goods or service. Employees can be interested in a company's financial information for several reasons. Companies may offer contributions to an employee's retirement account; the income statement usually lists the amount of these contributions in expenses accounts. Employees may also receive commissions or bonuses based on the amount of sales a company generated during a certain time period. Business owners can also treat employees like partners. Employee in a partnership-style organization often receives a portion of net income as their pay.


Banks often require small-business owners to present financial statements to secure loans. Business owners usually provide banks with several financial statements or other accounting information during the loan application process. Accounting information ensures the bank is making a wise investment. Bank also expects business owners will be able to repay the loan from future operational profits. Banks can require business owners to submit financial statements throughout the loan length so the bank can constantly assess the business' performance.


Management in every level of the business from director level of supervisor level relies on accounting information to do their job properly. The all use the same information for different purposes. For example, director use it for strategic purposes and middle management can use it to see if they are meeting their financial targets.