In: Accounting
Question 1
(1) An item of stock costing $60,000 was written down to its
realizable value of $35,000.
(2) School fees paid to the proprietor's son was debited to the
Drawings account.
(3) $2,500 paid for a printer was written off as expense(instead of
being capitalized).
(4) Assets like inventory are valued in dollars, not units, for the
financial statements.
(5) Company reports revenue when it is earned instead of when the
cash is collected.
(6) Assets will normally be recorded at their historical cost in
balance sheet.
Required
Identify the name of the concept or principle for the above
events.
Question 2
(a) On 30 March this year, Jason Wong the owner of Best Ltd
received $50,000 relating to sales made in the previous year. He
would like to include this $50,000 as income for the year as this
is the period in which money is received.
(b) During the year Jason Wong had purchased a car to use for his
family. Although the car has never been used in any way for the
business, he requested his accountant to include it in the balance
sheet of the company as he felt it would help to improve the asset
value.
Required:
Explain which accounting concept each of the above case has
violated
Answer For Question 1
1) Realisation Concept
2) Accounting Entity Concept
3) Materiality Concept
4) Money Measurment Concept
5) Accrual Concept
6) Historical Cost Concept
Answer For Question 2
a)It's the Violation of Revenue Rcognition Principal.The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized if they are realized or realizable (the seller has collected payment or has reasonable assurance that payment on goods will be collected)
According to above concept the income for previous year cannot include in current year income.
b) It's the violation of Accounting Entity Concept.In accounting, a business or an organization and its owners are treated as two separately identifiable parties.
Jason Wong had purchased a car to use for his family. Although the car has never been used in any way for the business, Its personel nature ,and it cannot include in Books of Accounts.