The difference between fixed asset and current asset fixed asset

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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. Example of this concept, if the owner withdraws money from the business account for personal use, it is recorded as drawing. Any injection or reinvestment or profit would be regarded as capital in the accounting context.

Accruals Concept

Concerned with the different 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. Example for this concept, if an enterprise sell some goods on credit, the sales is immediately recorded and an asset receivable will be recorded even through the customer has not get paid for the goods. If the goods were delivered on 18 June and the payment was made on 20 June, the sale is deemed to have place on 18 June.

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

Business have to close down because of shortage of case

Example of this concept, where the venture is a specific purpose like setting up a stall in an exhibition or fair or the construction or bridge under a contract, the business comes to an end on the competition of the project.

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 is use in the next year and so on

Example of this concept, if a company has adopted for one year method of straight line depreciation and in another year it changes it to written down value method then the profit for those two years can be compared as the change in method of depreciation will affect the profits to a great extend and hence proper conclusion can't be drawn.

Question 1 (c)

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

Capital Expenditure

Capital expenditure is made when a firm spends money either to:

Buy fixed asset

Add to the value of an existing fixed assert

Include in such amounts should be those spent on:

Acquiring fixed assert

Bringing them into the firm

Legal costs of buying building

Carriage inwards on machinery bought

Any other cost needed to get the fixed assert ready for use

Revenue expenditure

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

Different between revenue expenditure and capital expenditure

The different between revenue and capital expenditure can be seen clearly with the total cost of using the a motor van for a firm. To buy motor van is capital expenditure. The motor van will be in use for several years and is, therefore, a fixed asset

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.

The accounting treatment of each type of expenditure:

Revenue expenditure - Expenses - Income statement

Capital expenditure - Fixed asset - Balance sheet

Question 1 (d)

Plant and Machinery was purchased on 1st June 2005 for RM 100000 and estimated disposal value of RM 10000. Compute the depreciations for the years 2005 and 2006 using the reducing balance taking the rate 10% method.

Years 1: 100000 10 % Ã- 7/ 12 = 5833 100000 - 5833 = 94167 ( Reducing Balance )

Years 2 : 94167 Ã- 10 % = 9417 94167- 9417= 84750 (Reducing Balance )

Question 1 (e)

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

Relevance

Reliability

Comparability

Understandability

Relevance

Relevance means that management accounting information applies to certain materials, labor or overheat in the company. This information allow company to determine which cost are direct or indirect, where direct cost relate to ancillary service. Relevance cost relate to the current decision at hand. Management accounting can report several types of information; however information may be unnecessary for a decision.

Reliability

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 on the truthfulness of thee information.

Comparability

Consideration in decision making, in addition to the quantitative or financial factor highlighted by Incremental Analysis. They are factor relevant to a decision that are difficult to measure in terms of money.

Understandability

The 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.

Question 1 ( f )

Identifying any five user of accounting information

Bank

Capital

Creditor

Government

Shareholder

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

140000

Equipment at cost

70000

Provision for deprecation at 01/01/09

 

Property

4200

Equipment

17500

Purchases

385000

Sales

592000

Stock at 01/01/09

17400

Discount allowed

14000

Discount received

1900

Returns outward

17600

Wages and salaries

43400

Creditors

28500

Debtors

15800

Bank overdraft

2900

Cash in hand

520

Drawing

17950

Provision for bad depts. at 01/01/09

200

General expenses

11400

Long term loan

20000

Capital at 01/01/09

30670

The following adjustments need o be taken into account:

Stock at 31/12/09 is RM 21600

Wages and salaries outstanding at31/12/09 are RM 4100

General expenses include a prepayment for rates of RM 1000

The provision for bad debts needs increasing to RM 280

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

Property 1.5% per year using the straight line method

Equipment 25% per year using the reducing balance method

Loan interest of RM 2000 is outstanding

Required :

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

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

(A)

Betsy Li

Trial balance as at 31 December 2009

 

Debit

Credit

Property at cost

140000

 

Equipment at cost

70000

 

Provision for deprecation at 01/01/09

 

 

Property

 

4200

Equipment

 

17500

Purchases

385000

 

Sales

 

592000

Stock at 01/01/09

17400

 

Discount allowed

14000

 

Discount received

 

1900

Returns outward

 

17600

Wages and salaries

43400

 

Creditors

 

28500

Debtors

15800

 

Bank overdraft

 

2900

Cash in hand

520

 

Drawing

17950

 

Provision for bad depts. at 01/01/09

 

200

General expenses

11400

 

Long term loan

 

20000

Capital at 01/01/09

 

30670

Total

715470

715470

( B(i) ) Betsy Li

Income statement for the year ended 31 December 2009

RM

RM

RM

Sales

592000

less) cost of good sales

Opening stock

17400

Purchases

385000

less)Return outwards

(17600)

367400

384000

less) closing stock

(21600)

363200

Gross profit

228800

other income

Discount received

1900

230700

Expenses

Discount allowed

14000

Wages & salaries ( 43400+4100)

47500

Increase provision for bad debt

80

General expenses( 11400-1000)

10400

Depreciation of property (w1)

2100

Depreciation of equipment (w2)

13125

Loan interest

2000

89205

Net profit

141495

Working 1 Working 2

Depreciation of property Depreciation of equipment

1.5 % Ã- 140000 = 2100 70000 - 17500 = 52500

52500 Ã- 25 % = 13125

( B(ii) ) Betsy Li

Balance sheet as at 31 December 2009

At Cost

Accumulated Depreciation

Net Book Value

RM

RM

RM

Non- Current Asset

Property

140000

6300

133700

Equipment

70000

30625

39375

Current Asserts

Stock at 31/12/09

21600

Debtors

15800

Provision for bad debts

(280)

15520

Cash in hand

520

General expenses prepayment

1000

38640

Current Liabilities

Creditors

28500

Bank overdraft

2900

Wages & salaries outstanding

4100

Loan interest outstanding

2000

(37500)

Working capital

1140

174215

Finance by:

Capital

30670

Net profit

141495

172165

less) Drawing

(17950)

154215

Non-current liabilities

long term loan

20000

174215

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