principles of accounting and double entry

Question 1

purpose of accounting

Answer 1

to aid in the management of business

Question 2

advantages of using ICT in recording transactions and preparing financial statements (4)

Answer 2

• Regular reports will be available e.g profit statement
• Less storage of documents-paperless office is more sustainable.
• single entry errors will not occur. will complete the double entry so the
  correct corresponding account will receive the entry.
• arithmatical accuray The software will ensure that for every debit there is a credit

Question 3

disadvantages of using ICT in recording transactions and preparing financial statements (4)

Answer 3

*Cost of equipment and software can be high
*Training to use the software will take time away from running the business.
*business might not be big enough to justify the expenditure.
*Viruses could remove data and hackers could gain access to data.

Question 4

types of concepts (9) (Gotta Conquer Real Problems And Have More Brilliance, Mate!)

Answer 4

Going concern
Consistency
Prudence
Accruals
Historical costs
Money measurement
Business entity
Materiality
Realization

Question 5

going concern

Answer 5

The assumption that a business is to continue for the foreseeable future, or has infinite lives

Question 6

relationship of depreciation and going concern

Answer 6

the cost of the non-current asset can be allocated over many years of its’ economic life

Question 7

where is going concern not applicable

Answer 7

• if business is going to close down in the near future
• shortage of cash makes it certain that the business will have to cease trading

Question 8

consistency

Answer 8

accounting method chosen, when choice is available, should remain unchanged from one period to another, unless there is a compelling reason for change

Question 9

why is consistency needed

Answer 9

If the organization constantly changes its methods, it would mislead the profit calculated and an inaccurate analysis
will be made for the organisation.

Question 10

what concept does inventory valuation follow

Answer 10

consistency

Question 11

prudence

Answer 11

Profit should not be overstated; losses should not be understated.
(Losses should be accounted for as soon as they are recognized, Revenue is not anticipated before it has been realised)

Question 12

Accruals

Answer 12

that revenues generated in accounting period should
match against the expenses involved in earning those revenues.

Question 13

examples of accruals

Answer 13

owing and prepaids, provision of doubtful debt, provision for depreciation

Question 14

historic costs

Answer 14

Inventory should be recorded at cost (1)AO1 at time of purchase /
not at its market value (1)AO1

Question 15

net realizable value

Answer 15

Where realizable value is less than cost, the estimated selling price (1)AO1
less any further costs before the goods are suitable for sale. (1)AO1

Question 16

Money measurement

Answer 16

every recorded event or transaction is measured in terms of monetary value

Question 17

Business entity

Answer 17

financial affairs of business should be separate from the
personal transaction of owners.

Question 18

Materiality

Answer 18

business should not have separate recording for small accounts as it
doesn’t effect on the decision making of the business

Question 19

Realisation

Answer 19

revenue can only be recognized once the goods or services associated have been delivered or rendered

Question 20

advantage of accounting concepts (5) (dont talk specifically ab any concepts here unless asked)

Answer 20

*Provides a framework of consistency in preparing all financial statements.
* Comparison can be drawn between business, periods and countries
* meets legal requirement
* true and fair view
* profits can be relied on by stakeholders

Question 21

disadvantage of accounting concepts (3)

Answer 21

• It will require staff to be skilled in accounting techniques, which is costly
• They ignore non-financial factors of business.
• Concepts can be contradictory

Question 22

capital expenditure

Answer 22

Money spent on buying or improving fixed assets which will last for more than one year used to benefit the business

Question 23

revenue expenditure

Answer 23

day-to-day expenses of running a business, doesn’t extend benefit for over a year, and usually used to benefit profit maximization, like maintenance charges

Question 24

how is revenue expenditure treated

Answer 24

Revenue expenditure is written off against profit in the income statement

Question 25

how is capital expenditure treated

Answer 25

Capital expenditure is recorded in the balance sheet of the company and written off over the estimated useful life of the asset.

Question 26

If Capital expenditure is classified as revenue expenditure (consider income statement and financial position)

Answer 26

then profit will be understated > The statement of financial position will be
understated > non current assets will be understated

Question 27

If revenue expenditure is treated as capital expenditure (consider income statement and financial position)

Answer 27

then profit will be understated as expenses
will be lower > statement of financial position will be overstated because the non-current assets will
be increased incorrectly.

Question 28

causes of depreciation of non current assets (4)

Answer 28

• Physical deterioration (wear and tear)
• Obsolescence
• Depletion
• time factor

Question 29

Benefits of using straight line rather than reducing method (3)

Answer 29

• Straight line is simpler to compute.
• Gives equal depreciation to equal benefit received in each year.
• Does not distract profit with higher levels of depreciation in years.

Question 30

disadvantages of using straight line over reducing method (3)

Answer 30

• Machinery will lose more value early years of ownership than later years.
• Balance sheet values may not be in line with market value of machinery.
• Total cost of ownership will increase using straight line as maintenance costs rise as the asset become older

Question 31

Benefits of using reducing balance method over straight line (3)

Answer 31

• Greater depreciation written off in early years which may reflect higher value loss in early years
• more realistic value if asset loose more value in early years. Eg. Motor vehicle.
• Profits will be lower in early years but higher in the later years.

Question 32

disadvantages of using reducing balance method over straight line (3)

Answer 32

• Distorts profit calculation with high depreciation in early years.
• Not consistent with previous practice.
• Not appropriate if the asset is used equally from year to year.

Question 33

Concepts applicable for depreciation: (2)

Answer 33

• Consistency concept
• Accrual/Matching concept

Question 34

concept that supports changing depreciation

Answer 34

prudence

Question 35

Why depreciation is an application of accrual concept?

Answer 35

Fixed asset will last for more than one accounting period > give benefits to a number of accounting period > the original cost of asset is apportioned or matched to the accounting periods over the benefit is received.

Question 36

advantages of maintaining double entry (4)

Answer 36

• Details of individual accounts will be available
• Financial statements can be prepared to ascertain profit on a regular basis
• Easier to make decisions because financial information is readily available
• 3rd parties such as banks can rely on the information and grant loans.

Question 37

disadvantages of not maintaining double entry (3)

Answer 37

No information about expenditure or income
Inadequate information to manage the business
Individual expense totals paid not known

Question 38

disadvantages of maintaining double entry (3)

Answer 38

• Skill required to complete the books of accounts
• Cost implications of employing a specialist. Time required by the owner..
  *Increase workload in business

Question 39

advantages of control ac (4)

Answer 39

• increase the accuracy of double entry system.
• will be needed to prepare financial statements with confirmed judgements.
• can detect fraud
• shows value of assets and liabilities related to credit sales and credit purchases.

Question 40

disadvantages of control ac (4)

Answer 40

• Bookkeeper have to be skilled on maintaining the control accounts
• It may not detect some errors.
• Control accounts themselves may contain errors.
• This will require huge amount of time to prepare such accounts when other works can be more
  important to business.

Question 41

Reasons for a debit balance in purchase ledger control account (4)

Answer 41

*Goods returned after payment made.
* Discount received not posted.
* Overpayment to creditor.
* Contra from sales ledger

Question 42

Difference between trade receivables ledger and sales day book:

Answer 42

• The trade receivables ledger consists of the individual Accounts
• The sales day book lists all of the credit sales Made in a day/specific period. before it is Totalled and posted to the ledger