Written Elements

Question 1

What is the accounting equation?

Answer 1

Assets = capital + liabilities

Question 2

What is the business entity concept?

Answer 2

The owner’s financial affairs should be kept separate from those of the business, this is why a sole trader keeps a drawings and a capital account

Question 3

What is the dual aspect concept?

Answer 3

Every transaction must affect two accounts, one debit one credit

Question 4

What is the materiality concept?

Answer 4

Only assets above a certain value are only considered Non-current assets

Question 5

What is the prudence concept?

Answer 5

Assets and profits should be understated rather than overstated

Question 6

What is the accruals/matching concept?

Answer 6

Expenses and revenues are matched to when they occur, not to when they are paid or received

Question 7

What is the going concern concept?

Answer 7

A business should assume it will continue for the foreseeable future

Question 8

How can businesses reduce the possibility of irrecoverable debts?

Answer 8

• obtain references
• set credit limits
• chase up trade receivables

Question 9

State what depreciation, % depreciation rate and approximate life of the following NCA: Buildings, computers, motor vehicles, fixtures and machinery

Answer 9

Buildings - SLM, 2-4%, 50-100yrs 
Computers - RBM, 20-25%, 4-5yrs
Motor Vehicles - RBM, 20-25%, 4-5yrs
Fixtures - SLM, 10%, 10yrs
Machinery - RBM, 20-25%, 4-5yrs

Question 10

Does depreciation provide cash for a replacement of an NCA? Why not?

Answer 10

• Depreciation does not generate cash

- Depreciation only ensures a correct valuation of assets so the NBV is true

Question 11

What to say if I asked to comment on a businesses policy for irrecoverable and double debts

Answer 11

• Say if the elements are unwise
• no provision up to a month is normal
• The older the debt, the more likely it is to become irrecoverable

Question 12

Why is the double entry bookkeeping useful?

Answer 12

• orderly

- can make a trial balance (to easily calculate profits and losses) the

Question 13

Why does depreciation happen?

Answer 13

• physical deterioration through use (“wear and tear”)
• Obsolescence (advances in technology)
• Depletion (running out of raw materials)
• the passage of time (some assets only have a set number of years to live)