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    Accounting Principles and Policies: Transaction Relevant Principle

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    Kenshin Hayashi
    This document provides examples of accounting principles and policies being applied in various business transactions. It discusses key principles like accruals, consistency, prudence, and the business entity concept. It provides scenarios to illustrate how different principles would apply, for example adjusting expenses for prepayments under the accruals principle. It also defines various principles and discusses how the dual aspect concept applies to transactions.

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    Accounting Principles and Policies: Transaction Relevant Principle

    Uploaded by

    Kenshin Hayashi
    29 views5 pages
    This document provides examples of accounting principles and policies being applied in various business transactions. It discusses key principles like accruals, consistency, prudence, and the business entity concept. It provides scenarios to illustrate how different principles would apply, for example adjusting expenses for prepayments under the accruals principle. It also defines various principles and discusses how the dual aspect concept applies to transactions.

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    Accounting 19

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    This document provides examples of accounting principles and policies being applied in various business transactions. It discusses key principles like accruals, consistency, prudence, and the business entity concept. It provides scenarios to illustrate how different principles would apply, for example adjusting expenses for prepayments under the accruals principle. It also defines various principles and discusses how the dual aspect concept applies to transactions.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    29 views5 pages

    Accounting Principles and Policies: Transaction Relevant Principle

    Uploaded by

    Kenshin Hayashi
    This document provides examples of accounting principles and policies being applied in various business transactions. It discusses key principles like accruals, consistency, prudence, and the business entity concept. It provides scenarios to illustrate how different principles would apply, for example adjusting expenses for prepayments under the accruals principle. It also defines various principles and discusses how the dual aspect concept applies to transactions.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    CHAPTER 19

    ACCOUNTING PRINCIPLES AND POLICIES


    Question 1

    Transaction Relevant principle


    When preparing the income statement an adjustment
    was made to an expense account to record a Accruals (matching)
    prepayment.
    Occasionally items are damaged in a business’s
    stockroom. These items are often valued at net Prudence
    realisable value because it is less than cost.
    A business always a makes a provision for doubtful
    debts based on 5% of trade receivables at the year Consistency
    end.
    The owner purchased a birthday gift for a member of
    the family using the business’s money. The amount Business entity
    spent was debited to the drawings account.

    Question 2

    Transaction Relevant principle


    The business has always used the straight-line
    Consistency
    method of depreciation at 20% per annum every year.
    A customer’s account which has been unpaid for 12
    Prudence
    weeks has now been written off as a bad debt.
    The owner paid the business’s rent from his private
    funds. In the business’s accounts a debit entry was
    Business entity
    made in the rent account and a credit entry in the
    drawings account.
    The business receives rent from a tenant. The amount
    transferred to the income statement took account of
    Accruals (matching)
    the fact that the tenant owed an amount for rent at the
    year end.
    Question 3

    Answers could include:

    Principle One key point about this principle Example of the principle being used
    Accruals Ensure profits are based on Adjusting expenses for prepayments
    matching the revenue for a year and accruals.
    with the costs incurred in order to Adjusting income items for amounts
    achieve that revenue, whether due or received in advance.
    paid or not. Depreciation non-current assets.
    Adjusting purchases for unsold
    inventories.
    Prudence Where there is doubt, assets and Valuing inventories at the lower of
    profits are under- rather than cost or net realisable value.
    overstated; liabilities and losses Reducing trade receivables by a
    are over- rather than understated. provision for doubtful debts.
    Writing off the amount due from a
    trade receivable as soon as it is
    reasonably certain that a bad debt
    has occurred.

    Question 4

    Answers could include:

    Principle One key point about this principle Example of the principle being used
    Consistency Accounting policies and Using the same depreciation method
    procedures should be carried out each year.
    in the same way each year. Using the same rate of provisions for
    doubtful debts each year.
    Business entity Separate records are kept of the Drawings account maintained to
    owner’s private transactions and record all withdrawals from the
    the business’s transactions in an business by the owner.
    accounting system.

    Question 5

    (a)
    (i) Cost of damaged items: 8 × $20 = $160
    (ii) Normal sale value of damaged items: 8 × $30 = $240
    (iii) Realisable value of damaged items: 8 × $22 = $176
    (iv) Net realisable value of damaged items: 8 × $17 = $136

    (b) and (c) Inventories must be valued at the lower of cost ($160) or net realisable
    value ($136); so damaged items should be valued at $136.

    Question 6

    (a)
    (i) Cost of damaged items: 4 × $40 = $160
    (ii) Normal sale value of damaged items: 4 × $60 = $240
    (iii) Realisable value of damaged items: 4 × $43 = $172
    (iv) Net realisable value of damaged items: 4 × $35 = $140

    (b) Inventories must be valued at the lower of cost ($160) or net realisable value
    ($140); so damaged items should be valued at $140

    Question 7

    Transaction Relevant principle


    The owner sent some samples to a potential new
    customer. However, this transaction has not been Realisation
    entered in the sales account.
    The fittings could be sold for far less than is shown on
    the balance sheet. However, no changes have been Going concern
    made to the accounting records.
    When a bank loan was repaid two entries were made
    in the accounting records affecting an asset account Duality
    and a liability account.
    No record has been made in the accounting system of
    Money measurement
    the fact that the workforce had a very high morale.

    Question 8

    Transaction Relevant principle


    The payment of interest has resulted in making two
    Duality
    entries in the accounting system.
    The staff have been praised for their very positive
    customer relations. No record has been made of this Money measurement
    in the accounting system.
    The business has been very successful, but no record
    has been made of the value of goodwill in the Going concern
    accounts.
    Goods have just been sent to a customer. No
    payment has been made by the customer and the
    Realisation
    invoice for the goods will not be sent until next week.
    No entries have been made for this sale so far.

    Question 9

    Definition Principle
    Accounting for a sole trader’s business is clearly
    separated from accounting for the owner’s private Business entity
    transactions.
    A sale occurs when money or the promise of
    Realisation
    money is received.
    Accounting systems are based on the idea that
    Duality
    there is a two-fold aspect to every transaction.
    Profits are assessed on the basis of amounts due
    or receivable for a period of time rather than Accruals
    amounts actually paid or received.
    Question 10

    Definition Concept
    The assumption is made the business will continue to
    Going concern
    trade indefinitely when valuing assets.
    A business should endeavour to maintain the same
    accounting policies from one year to the next to aid Consistency
    comparability of results.
    Some important aspects of a business’s performance
    Money measurement
    cannot be quantified in financial terms.
    Where there is doubt, the lower value for an asset or
    Prudence
    profit is preferred.

    Question 11

    Answers could include:

    Principle One key point about this principle Example of the principle being
    used
    Duality Every transaction has two aspects, so Any transaction and a statement of
    two entries are made for a transaction the account to be debited and
    in an accounting system. credited.
    Realisation A sale occurs when the customers A sale is not recorded on the basis
    pays or when an invoice is issued. of receiving an order.
    Goods sent to a customer at the
    end of one year, but invoiced at the
    beginning of the second year,
    should be recorded as a sale in the
    second year.

    Question 12

    Answers could include:

    Principle One key point about this principle Example of the principle being used
    Money Only transactions with a definite No record is made of the benefit a
    measurement money value are recorded. business receives from being well
    located, having a successful
    management team, having a loyal
    staff.
    Going While a business is trading assets are A delivery vehicle is recorded in the
    concern valued on the basis of their cost accounts at cost less depreciation,
    rather than what they could be sold and not at what it would fetch if sold
    for. off.
    If the business was closed and its
    assets sold off, then the delivery
    vehicle would be valued at its likely
    resale value.
    Question 13

    International accounting standards will help the users of accounts because they
    ensure that accounts are prepared in the same way and based on the same
    principles in a wide range of countries. Users will be able to make valid comparisons
    of the result shown in these accounts.

    International accounting standards also ensure that accounts for businesses in a


    wide range of countries provide the information a user will need in order to, for
    example, make judgements about performance or about whether to invest in a
    business.

    Question 14

    International accounting standards ensure that accounts for businesses from a wide
    range of countries are reliable because the information shown will be objective and
    provide a true and fair picture of the financial position.

    International accounting standards give a high priority to the user of the accounts of
    businesses from a wide range of countries, so that information provided, although
    technical, will be understandable.

    EXAM-STYLE QUESTIONS

    Q Ans Q Ans Q Ans Q Ans Q Ans


    15 D 16 D 17 B 18 B 19 A
    20 D 21 B 22 B 23 C 24 B
    25 B

    Question 26

    (a) $145
    (b) Khalaf should value the loudspeaker at the lower of cost or net realisable
    value.
    (c) This is an example of using the prudence principle.

    Question 27

    (a) Undamaged inventory: 19 × $320 = $6 080


    (b) Washing machine A: $320 (cost)
    (c) Washing machines B, C and D: $300 each (net realisable value)

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