The Framework For The Preparation And Presentation Of Financial Statements Accounting Essay

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Question 1

Explain the difference between fixed assets and currents assets.

Explain the following concepts:

Business Entity Concept

Accruals Concept

Going Concern Concept

Consistency 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 RM 100, 000 and estimated disposal value of RM 10, 000. Compute the depreciation for the year 2005 and 2006 using the reducing balance taking the rates 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. There are:

Relevance

Reliability

Comparability

Understandability

Identify any five users of accounting information.

Answer of the question 1:

Fixed Asset is a long term, tangible asset use for the business and which the cost is fixed and the cost is not to be converted into cash on the upcoming financial year.

Current Assets is the assets that receivable, inventory, cash etc. which is the cost that not fixed because a normal course of business use to convert the money into goods or change back into cash. On the other hand, current asset can use to be bought for sales.

b)

The account concept is use to record the financial in the corporate entity, it is separate from the people who to finance. This is mean, the business to be treat separate from the non-business activities of the owners.

An accounting method that included income and expense items as they are used to earn or to incurred irrespective when money is received or paid out.

Going concern concept can defined like, if a company will continue to operate the business, because it happen will going out of business. For this happen, the company must be able to take responsible to raise the business enough resource to stay operational.

Once the entity has being chosen an accounting method, which is mean it should be continue to use the same method, except for a sound reason to do. If not any accounting method change must be disclosed.

c) Capital expenditure

Capital expenditure can be defined as money spent to buy or upgrade with physical assets such like building and machinery, electricity etc.

Revenue expenditure

Revenue expenditure can meaning as a maintaining a revenue assets, this assets is include repair and maintenance expenses, because this are incurred to support some of the current position. Another revenue is use to operate with a business, like sales, rent, office supplies etc.

d) 2005 - RM 100,000 x 10% = 10, 000

2006 - RM10, 000 x 10% = 1, 000

10, 000 - 1, 000 = 9, 000

I: Relevance - Relevance financial information is capable for making decision by the users. Financial information is use to making a difference decision if there have predictive value, confirmatory value.

II: Reliability - Reliable accounting information is free form business owner, managers or professional accountants. Business stakeholders need reliable information so they can tell all information is accurate and valid.

III: Comparability - Comparability is the ability to compare with one of the company accounting information and also another company information. This related a company accounting information financial reports. A company can use with difference accounting information to record their method. Asset and liabilities and other information are to list the format for analysis.

IV: Understandability - understandability is a characterizing to presenting the information clearly and concisely can make it understandable. If some cannot be understand, to exclude such of the information will make for the financial report incomplete and potentially misleading. Financial reports use to have reasonable knowledge of business and economic activates and who to review and to analyses the information with diligence.

f)

Bank

Supplier

Government

Owner

Manager

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 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

Return 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 adjustment need to be taken into account:

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

b) Wages and Salaries outstanding at 31/12/09 are $4,100

c) General Expenses include a prepayment for rates of $1,000

d) The provision for bad debts needs increasing to $280

e) 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

f) Loan interested of $2,000 is outstanding

Require:

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

Answer of Question 2

(a)

Trial Balance for Betsy Li as at 31 December 2009

 

 

RM

Property at cost

140,000

Equipment

70,000

Provision for Depreciation at 01/01/09

 

: Property

 

: Equipment

 

Purchase

385,000

Sales

 

Stock at 01/01/09

17,400

Discount Allowed

14,000

Discount Received

 

Return Outward

 

Wages and Salaries

43,400

Creditors

 

Debtors

15,800

Bankoverdraft

 

Cash in Hand

520

Drawings

17,950

Provision For Bad Debts at 01/01/09

 

General Expenses

11,400

Long Term Loan

 

Capital at 01/01/09

 

 

 

 

 

 

715,470

(b)

Besty Li the Income Statement as at 31 December 2009

 

 

RM

RM

Sales

 

 

Less: Cost of Goods Sold

 

 

Opening Stock

 

17,400

Purchase

385,000

 

Less: Return Outwards

17,600

367,400

 

 

384,800

Less: Closing Stock

 

21,600

 

 

 

Gross Profit

 

 

Add: Revenue

 

 

Interested Prepaid

 

 

Discount Received

 

 

 

 

 

Less: Expenses

 

 

Discount Allowed

 

14,000

Wages & Salaries (43,400 - 4,100)

 

39,300

Increasing of Provision for Bad Debts

 

80

General Expenses

 

10,400

Depreciation of Property (140,000 x 1.5%)

 

2,100

Depreciation of Equipment ({70,000 - 17,500}x25%)

 

13,125

 

 

 

 

 

 

 

 

 

 

 

Cost

Accumulated Deprecation

Net Assets

Fixed Assets

 

 

 

Property

140,000

6,300

133,700

Equipment

70,000

30,625

39,375

 

210,000

36,925

173,075

Current Assets

 

 

 

Closing Stock

 

21,600

 

Debtors

15,800

 

 

Add: Interest Prepaid

2,000

 

 

: wages & salaries prepaid

4,100

 

 

:General expenses prepaid

1,000

 

 

 

22,900

 

 

Less: provision For Bad Bebts

280

22,620

 

Cash in Hand

 

520

 

 

 

44,740

 

Less: Current Liabilities

 

 

 

Creditors

28,500

 

 

Bank overdraft

2,900

31,400

13,340

 

 

 

186,415

Finance by:

 

 

 

Capital at 01/01/09

 

30,670

 

Add: Net Profit

 

153,695

 

 

 

184,365

 

Less: Drawing

 

17,950

 

Capital at 31/12/09

 

166,415

 

Long-Term Liabilities

 

 

 

Long-Term Loan

 

20,000

186,415

 

 

 

 

 

 

186,415

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