The Difference Between Current Assets And Fixed Assets Accounting Essay

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The affairs of a business are to be treated as being quite separate from the non-business activities of its owner(s).

The accounting records reflect the financial activities of a specific corporate entity, separate and distinct from the people who finance it or work in it. It is one of the 'ground rules' of accounting.

Accruals Concept

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 item should be recorded when used and not when paid for.

Going Concern Concept

It implies that the business will continue to operate for the foreseeable future.

Example: the assumption should not be made are:

If 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.

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Business has to close down because of shortage of cash.

Consistency Concept

Each firm should try to choose the methods which give the most reliable picture of the business.

This cannot be done if one method is used in one year and another method is use in the next year and so on.

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

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, the motor van will be in use for several years and is, therefore, a fixed assets.

To pay for petrol to use in the motor van for the next few days is revenue expenditure, this is because the expenditure is used up in a few days and does not add to the value of fixed assets.

Capital expenditure

Is made when a firm spends money either to:

Buy fixed assets.

Add to the value of an existing fixed asset.

Included in such amounts should be those spent on:

Acquiring fixed assets.

Bringing them in to the firm.

Legal costs of buying building.

Carriage inwards on machinery bought.

Any other cost needed to get the fixed asset ready for use.

Revenue expenditure.

Expenditure which is not for increasing the value of fixed assets, but for running the business on a day-to-day basis, is known as revenue expenditure.

Accounting treatment.

Expenses - Income statement.

Capital - Fixed assets - Balance sheet.

d) Plant and Machinery was purchased on 1st June 2005 for RM100, 000 and estimated disposal value of RM10, 000. Compute the depreciation for the years 2005 and 2006 using the reducing balance taking the rate as 10% method.

Calculation:

2005 - RM 100,000 x 10% x 7/12 = 5833

RM 100,000 - 5833 = 94, 167

2006 - RM 94, 167 x 10% = 9417

RM 94, 167 - 9,417 = 84, 750

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

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

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

Comparability - This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability.

Understandability - This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities

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f) Identify any five users of accounting information.

Bank

Supplier

LHDN (Inland Revenue)

Manager

Potential share holder

Bibliografy

Ebrary, 2011, Financial Accounting, A practical approach ,

Retrieved 20th February

< http://www.ebrary.com/corp/accounting.jsp >

Ebrary. 2011, The Basics of Hospitality Accounting, Qualitative of financial information,

Retrieved 20th February,

<http://www.ebrary.com/corp/financial-information.jsp>

Ebrary. 2011, Accounting Concept, The important concept in Accounting,

Rretrieved 20th February,

<http://www.ebrary.com/corp/collateral/en/Corporate/ebrary_accountingbasicsinformationconcept =OEFFFKKEPMPJ,>

Question 2

You have been supplied with the following balance 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

Purchase 385,000

Sales 592, 000

Stock at 01/01/09 17,000

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 debt 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 prepayment for rates of $1,000

The provision for bad debt 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 $20,000

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.

The Trial balance for Betsy Li as at 31 Dec 2009

Debit

Credit

Property at cost

RM 140,000

Equipment at cost

RM 70,000

Provision for depreciation at 01/01/09

Property

RM 4,200

Equipment

RM 17, 500

Purchases

RM 385,000

Sales

RM 592,000

Stock at 01/01/09

RM 17,400

Discount allowed

RM 14,000

Discount received

RM 1,900

Returns outward

RM 17,600

Wages and salaries

RM 43, 400

Creditors

RM 28,500

Debtors

RM 15,800

Bank overdraft

RM 2,900

Cash in hand

RM 5,200

Drawing

RM 17,950

Provision for bad debts at 01/01/09

RM 200

General expenses

RM 11,400

Loan

RM 20,000

Capital

RM 30, 670

RM 715,470

RM 715,470

Income statement for the year ending 31 Dec 2009

RM

RM

RM

Sales

592,000

Less) Return inward

Net sales

Less) Cost of good sold

17,400

Purchases

385,000

Less)

(17,600)

Net purchase

367,400

384,800

Closing stock

(21,600)

(363,200)

228,800

Add) Revenue

1,900

Discount received

230,700

Less) Expenses

Discount allowed

14,000

Wages and salaries

47,500

General expenses

10,400

Provision for bad debt

80

Provision for depreciation: Property

2100

: Equipment

2000

Loan interest

13,125

(89,205)

Net profit

141,495

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

Property 1.5% per year using the straight line method.

1.5% x 140,000 = 2,100.

Property = 2,100

Equipment 25% per year using the reducing balance method.

70,000 - 17, 500

52,500 x 25%

= 13,125

Equipment = 13,125

Balance sheet as at 31 Dec 2009

Fixed assets

RM

RM

RM

Property

140,000

Less) Accumulated depreciation - property

(6,300)

133,700

Equipment

70,000

Less) Accumulated depreciation - equipment

(30,625)

39,375

173,075

Current assets

Stock

21,600

Debtor

15,800

Less) Provision for doubtful debt

(280)

15,520

Cash

520

Prepaid expenses

1,000

38,640

Less) Current liabilities

Creditor

28,500

Accrued expenses

6,100

Bank overdraft

2,900

(37,500)

Working capital

1,140

174,215

Financed by

Capital

30,670

Add) Net profit

141,475

172,165

Less) Drawing

(17,950)

154,215

Add) Long term loan

20,000

174,215