Accounting concepts used in the preparation of accounting records (AS Level) flashcards

Topic 5: Accounting concepts used in the preparation of accounting records

The ten general accounting concepts in 9615

Money measurement, duality, historic cost, going concern, accruals, consistency, prudence, materiality, realisation and business entity.

36 scarves cost $11 each. They will sell for $14 but need $4 of re-labelling and postage. Inventory value?

NRV = 14 − 4 = $10, below cost. Value 36 × 10 = $360, a write-down of $36.

60 units cost $15 each and have an NRV of $16.50 each. Inventory value?

NRV is above cost, so use cost: 60 × 15 = $900.

Goods at selling price $2,800 (mark-up 40% on cost) were sent on sale or return and recorded as sales; not accepted. Profit overstated by?

Cost 2,800 ÷ 1.40 = $2,000. Profit overstated by $800 (realisation).

A $65 desk fan will last six years. How is it recorded, and which concept allows this?

As an expense in the income statement; materiality.

A van costs $21,000; shelving fitted before use $1,400; first tank of fuel $90. Amount debited to vehicles?

21,000 + 1,400 = $22,400 (historic cost). The fuel is revenue expenditure.

Year end 30 June. Rent of $9,600 for twelve months was paid on 1 March. Prepayment at the year end?

4 months used (March to June); 8 months prepaid: 8/12 × 9,600 = $6,400 (accruals).

The owner transfers a private car to the business at an agreed value of $7,800. Entry and concept?

Dr Motor vehicles $7,800, Cr Capital $7,800. Business entity.

A business shows its machinery at what it would raise at auction next week, though it plans to keep trading. Which concept is broken?

Going concern: assets should be at cost less depreciation, not liquidation prices.

Prudence vs pessimism

Prudence means caution with estimates: do not overstate assets or profit, and recognise foreseeable losses. It does not allow deliberate understating of profit.

A machine cost $18,400, will sell for $1,600 after a 7-year life. Straight-line charge and concept?

(18,400 − 1,600) ÷ 7 = $2,400 a year; accruals (cost matched to the years that benefit).

Realisation vs accruals

Realisation decides whether revenue has been earned (goods or service passed to the customer). Accruals decides which period income and expenses belong to.