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Explain the difference between fixed assets and currents assets.
Explain the following concepts:
Business Entity Concepts
Going Concern Concept
State why it is important to differentiate between capital expenditure and revenue expenditure, and briefly explain the accounting treatment of each type of expenditure.
Plant and Machinery was purchased on 1st June 2005 for RM100,000 and 2006 using the reducing balance taking the rate as 10% method.
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:
Identify any five users of accounting information
Answer of question 1
The difference between fixed assets and current assets are the current assets are flexible in nature, easy to encashable and floting money to company whereas, and the fixed assets are fixed in nature in other words non-moving assets, not easy to encash, regularly depreciated. For example, the current assets such as sundry as furniture and fittings, tools, machinery, and so on.
Business Entity Concept it means always business is separate and owner are separate, the affairs of a business are to be treated as being quite separate from the non-business activities of its owners.
Accrual Concept means applies equally to revenue an expense. In the accrual basis of accounting revenue is recognized when it is realized, that means when the sale is complete or not.
Consistency Concept, which means once a business had adopted on one accounting method, it should use the same way for all subsequence events for the same character unless it has sound reason to change. This cannot be done if one method is used in one year and another method is used the next year.
Capital Expenditure is the outlay resulting in the increase or acquisition of an asset or increase in the earning capacity of a business. And the revenue expenditure is means that the outlay as a necessary for the maintenance of earning capacity including the upkeep of the fixed assets in a fully efficient state. And the accounting treatment of each type of expenditure that are suppliers, utilities, salaries, marketing, training, recruitment, and so on.
(2005) RM 100,000 x 6/12 x 10% = RM5000
(2006) RM95, 000 x 10% = RM9500
Relevance: Is one more factor that must be present in the information for it to be useful. Information that's not relevant is considered as a waste of valuable time in decision making.
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 most reliable to as compared to information gather by third parties. The user must be able to depend on the truthfulness of the information.
Comparability: ability to rank companies so as to facilitate financial decisions. Comparability is aided when companies employ similar accounting procedures, measurement concepts, classifications, basic financial statement formats, and methods of disclosure.
Understandability: this implies the expression, with clarity, of accounting information in such a way that who are generally assumed to have a reasonable knowledge of business and economic activities.
Suppliers, LHDN (Lembaga Hasil Dalam Negeri), managers, government, shareholder.
You have been supplied with the following balances for Betsy Li, a sole trader, for the year ended 31 December 2009:
Property at cost 140,000
Equipment at cost 70,000
Provision for depreciation at 01/01/09:
Stock at 01/01/09 17,400
Discount Allowed 14,000
Discount Received 1,900
Return Outward 17,600
Wages and Salaries 43,400
Bank overdraft 2,900
Cash in Hand 520
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
Stock at 31/12/09 is $21,600.
Wages and salaries outstanding at 31/12/09 are $4,100
General expenses include a prepayment 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.
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 December 2009
Property at Cost
Equipment at cost
Provision for depreciation(property)
Provision for depreciation(equipment)
Stock at 1/1/09
Wages and Salary
Cash in hand
Provision for bad debts 1/1/09
Long term loan
Income Statement for the year ending 31 December 2009
(less) cost of goods sold
(less) return outward
Wages and salary (43400 + 4100)
General expenses (11400 - 1000)
Depreciation of property
Depreciation of equipment(7000-17500) = 52500X25%
Provision for bad debts
Provision for doubtful debt
14000 x 1.5% = 2100
70000 - 17500 = 52500 x 25% = 13125
Provision for doubtful debt
Balance c/d 280 Balance c/d 200
Income Statement 80
Balance Sheet as at 31 December 2009
Less:)provision for doubtful debt
Cash at hand
Prepayment of sales
Accrual loan interest
Accrual for wages
(add)long term loan