Accounting procedures and principles of financial statements Flashcards
what is depreciation?
depreciation is the part of the cost of a non current asset that is consumed during the period in which it is used by the business
what type of an account is depreciation
an expense account
what are the causes of depreciation
1- wear and tear
2- obsolescense
3- passage of time
4- depletion
what is the purpose of accounting for depreciation?
to spread the cost of a non-current asset over its useful life
name two accounting concepts applied when charging depreciation?
prudence concept and matching concept
explain how charging depreciation is an example of the application of the principle of prudence and matching
prudence concept-
ensures that non current assets are shown at more realistic values
ensures that the profit for the year is not overstated
matching principle-
the cost of the non current asset and the revenues arising from its use are matched in an accounting period
or
the cost of the non current is spread over its useful life
what are the depreciable assets?
machinery, motor vehicles, fixtures and fittings
it is not usual to charge depreciation on land. Suggest reasons why depreciation should not be charged on land
1- land has an indefinite expected life
2- land does not wear out
3- land is not consumed by use
4- land increases in value overtime
what are the depreciation methods?
1- straight line method
2- reducing balance method
3- revaluation method
state the type of asset for which the revaluation method of depreciation is suitable
small items of equipment such as loose tools
suggest reasons why the straight line method would not be suitable method of depreciation to apply to hand tools used in a factory
1- principle of materiality
2- depreciate each item seperately
3- do not depreciate by an equal amount each
year
4- may be certain amount of loss of tools each
year
suggest one reason why the loose tools are revaluated at the end of each financial year rather than by using the straight line method or reducing balance method of depreciation
low value items which are not easy to depreciate separately/ not practical to keep detailed records of such asset
what are bad debts?
a bad debt is an amount owing to a business which will not be paid by the credit customer
what meant by the term ‘‘bad debt recovery’’
a bad debt recovered is when a credit customer pays some, or all of the debt previously written off as a bad debt
suggest ways to reduce the risk of bad debts
1- reduce credit sales and sell on a cash basis
2- obtain references from new credit customers
3- fix a credit limit for each customer
4- introduce/improve credit control
5- issue invoices and monthly statements
promptly
6- refuse further supplies until outstanding
balance is paid
7- give cash discount.
8- charge interest on overdue accounts
explain the meaning of the term provision for doubtful debt
a provision for doubtful debt is an estimate of the amount which a business may lose/ be unable to collect in a financial year because of bad debts
suggest ways which the amount of a provision for doubtful debts may be determined
1- percentage of the total amount owing by credit
customers
2- estimating which individual credit customers
will not pay their accounts
3- considering the length of time the debts have
been outstanding
4- estimate, based on experience, of amount lost
each year from bad debts
state which accounting principles is applied when a business makes provision for doubtful debts
matching concept
prudence concept
explain how the principle of prudence has been applied in recording this transaction
creating a provision for doubtful debt ensures that the profit is not overstated
explain how a business is applying the accounting principle of accruals by maintaining a provision for doubtful debts
the sales for which a business is unlikely to be paid are regarded as an expense of the year in which those sales are made
state the difference between a bad debt and a provision for doubtful debts
a bad debt is an amount owing to a business which will not be paid by a credit customer. a provision for doubtful debts is an estimate of the amount which a business will lose in the financial year because of bad debts
state three accounting principles applied to closing inventory
matching concept
prudence concept
realization concept
how should inventory be valued?
inventory should be valued either at lower cost, or net realizable value
define the term ‘‘cost’’ with regards to the term ‘‘net realizable value’’
cost is the purchase price of the goods plus any additional costs incurred in bringing the inventory to its present condition and position
