Question

1. Mr. Ahmad has established a small craft shop in Salalah. Presented below is two of accounting procedures and practices in his business. For each of these items, list and explain the assumption, principle, information characteristic, or modifying convention that is violated.

1. Mr. Ahmad purchased a new home computer for personal use with company money, charging miscellaneous expense. (1 Mark)
2. A machine, that cost OMR 4,000, is reported at its current market value of OMR 4,500. (1 Mark)

2. Mr. Saeed has a small bakery in Matrah; he believes it is foolish to report financial information on a yearly basis. Instead, he thinks that financial information should be disclosed only when significant new information is available related to his business. Can Mr. Saeed ignore the daily transactions that may occur in his business? Explain the reason by justifying the result which relates to GAAP. (1 Mark)

Answer 1

Ans.

a. Mr Ahmad has violated basic accounting concept of economic entity by recording purchase of computer from business money as miscellaneous expenses.  The Economic entity assumption states that the activities of the entity are to be kept separate from the activities of its owner and all other economic entities. So purchase of computer should be recorded as drawings in books of accounts of business. Purchase of computer for personal use is not business expense.

b. Recording of asset at current market value violates the historical cost concept. This concept requires business to record it's assets at historical cost and provide for depreciation and amortization of asset. Mr Ahmad has record machinery at current market value of OMR 4500, which violates the historical cost concept. Machine should be recorded at it's cost of OMR 4000.

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