Get premium membership and access questions with answers, video lessons as well as revision papers.

Define the following accounting concepts and for each explain their implication in the preparation of financial Statements. (i) The Going concern concept. (ii) Business entity concept. (iii) Materiality. (iv)...

      

Define the following accounting concepts and for each explain their implication in the preparation of financial Statements.
(i) The Going concern concept.
(ii) Business entity concept.
(iii) Materiality.
(iv) Realisation.

  

Answers


Mutiso
I) Going Concern Concept
This is the assumption underlying the preparation of Accounts in that the firm is
assumed to be continuing in operation to the foreseeable future.
It is further assumed the firm has neither the intention for the need to liquidate or
reduce significantly the scale of its operations. If a firm is a going concern then the
accounts should be prepared by use of Historical cost concept when valuing the
assets.
This concept should not be used if:
i) If the business is going to close down in the near future.
ii) Where shortage of cash makes it almost certain that the firm will not go
on.
iii) Where a large portion of the co. will be closed down due to shortage of
cash.
II) The Business Entity Concept
The concept implies that the affairs of a business are to be treated as being separate
from the non business activities of its owners.
The only time the activities of the owners are to affect the activities of the business
is when he has injected capital into the firm.
The effects of this is that the income and expense of the firm are not mixed with
those of the proprietor and as such even reporting is totally different and done in
different books.
This ensures that the performance of the company is well know to avoid any
collapse due to a lack of accountability.
III) Materiality
Information is said to be material if its omission or misstatement could influence
the economic decisions of users taken on the basis of the financial statements.
It depends on the size of the particular item judged in a particular circumstance.
It provides a cut-off point which a co. can use to decide which items are to be
disclosed in its financial statements.
IV) Realisation
This is part of the prudence concept.
It holds that profit and gains can only be taken into account when realization has
occurred and that realization occurs only when the ultimate cash realized is capable
of being determined with reasonable certainty.
Examples of this are:
- Goods or services are provided for the buyer
- The buyer accepts liability to pay the goods or services
- The monetary value of the goods or services has been established. Etc
It should be noted that under the realization concept the worst scenario is assumed
to avoid the company disclosing information which could subsequently found to be
misleading to parties who usually deal with the business.
Mutiso answered the question on November 16, 2018 at 05:16


Next: Joyce Njeri runs a City Market stall selling curios of all descriptions. Most of her sales are for cash, although regular customers are allowed credit. No...
Previous: Two accounting concepts or conventions could clash or there could be inconsistency between them. Give two examples of such situations and explain how the inconsistency should be resolved.

View More CPA Financial Accounting Questions and Answers | Return to Questions Index


Learn High School English on YouTube

Related Questions


  • Joyce Njeri runs a City Market stall selling curios of all descriptions. Most of her sales are for cash, although regular customers are allowed credit. No...(Solved)

    Joyce Njeri runs a City Market stall selling curios of all descriptions. Most of her sales are for
    cash, although regular customers are allowed credit. No double entry accounting records have
    been kept, but the following information is available.

    Net Assets Summary at 31 March 1999
    fa42008.png
    Additional information:
    1. Joyce Njeri bought a new motor van in January 2000 receiving a part-exchange
    allowance of Sh.1,800,000 for her old van. A full year's depreciation is to be
    provided on the new van, calculated at 20% on cost.
    2. Joyce Njeri has taken Sh.50,000 per week for her personal use. She also estimates
    that petrol for the van, paid in cash, averages Sh.10,000 per week.
    3. Other items paid in cash during the year were:
    - Sundry expenses Sh.24, 000
    - Repairs stall roof Sh.20 1,000
    4. Joyce Njeri makes a gross profit of 40% on selling prices. She is certain that no goods
    have been stolen but remembers that when her friend Anne Mwende was getting
    married, she gave her a wedding gift of curios worth Sh.100,000. Earlier in the year, she
    had presented curios worth Sh.200,000 to her mother to be sold at her brother's
    university fees fundraiser. Both these figures are stated at selling prices.
    5. Trade debtors and creditors at 31 March 2000 are Sh.320,000 and Sh.233,000
    respectively, and cash in hand amounts to Sh.39,000. No stock count has been
    made and there are no accrued or prepaid expenses.
    fa4b2008.png
    Interest amounting to Sh.27, 000 on bank overdraft for six months ended 31 March 2000
    was debited in the bank statement on 1 April 2000.

    Required:
    Joyce Njeri's trading and profit and loss account for the year to 31 March 2000 and a balance
    sheet as at that date. (Assume a 52-week year).

    Date posted: November 16, 2018.  Answers (1)

  • Kamau and Kimani are partners sharing profits and losses in the ratio 3:2 respectively. The partnership agreement provides for Kimani to receive a salary of Sh.4,000,000...(Solved)

    Kamau and Kimani are partners sharing profits and losses in the ratio 3:2 respectively. The
    partnership agreement provides for Kimani to receive a salary of Sh.4,000,000 per annum, and
    interest on capitals for both partners at 5% per annum. The partnership balance sheet as at 31
    December 1998 was as follows:
    Fa32008.png
    On I April 1999 Kimata was admitted to the partnership. He had been a salaried employee,
    earning Sh.8, 000,000 per annum. The terms of his admission to the partnership were as
    follows:
    1. Kimata should introduce Sh. 12,000,000 in cash as capital into the business.
    2. Goodwill should be valued at Sh.14, 000,000 for the purpose of his admission. It was
    agreed that goodwill should not be included in the balance sheet of the new partnership.
    3. Kimata should receive a salary as a partner of Sh.6 , 000,000 per annum.
    Kimani's salary should be raised to Sh.6, 000,000.
    4. Interest on capital should be raised from 5% to 6% per annum and calculated on the
    capital accounts after the elimination of goodwill.
    5. The new profit sharing ratio for Kamau, Kimani and Kimata should be 4:2:1
    respectively.
    In preparing the draft financial statements for the year ended 31 December 1999, the
    partnership accountant, Otieno, calculated that the partnerships profit for the year was Sh.55,
    155,000, and that the working capital of the business as at 31 December 1999 was:
    Fa3b2008.png
    Profit is assumed to accrue evenly during the year.
    Partners cash drawings for the year were Kamau Sh.23,705,000, Kimani Sh.19,525,000 and
    Kimata Sh.8,250,000.
    Required:
    (a) The profit and loss appropriation account for the year ended 3 1 December 1999.
    (b) The current and capital accounts of the partners for the year ended 31 December
    1999.
    (c) Balance Sheet as at 31 December 1999.

    Date posted: November 16, 2018.  Answers (1)

  • Mr. Ancentus Okwengo is the sole proprietor of a small business. The following trial balance was extracted from his books at 31 March 2000.(Solved)

    Mr. Ancentus Okwengo is the sole proprietor of a small business. The following trial balance
    was extracted from his books at 31 March 2000.
    Fa22008.png
    Additional information:
    1. Closing stock on 3 1 March
    2000 was Sh.2, 008,000.
    Loose tools at valuation
    Sh.384, 000.
    2 .Provision is to be made for the following amount
    owing on 3 1 March 2000: Electricity and power
    Sh.192,000.
    3. Payments in advance on 31 March
    2000 were as follows: Van licenses
    Sh.2,520 and rates Sh.13,800.
    4. Depreciation on plant and machinery and delivery vans is to be provided at the rate of
    20% and 25% respectively on cost at the end of the year.
    5. Bad debts amounting to Sh.26,000 are to be written off and the provision for
    doubtful debts is to be 10% of trade debtors.
    Required:
    A ten-column worksheet for the year ended 31 March 2000.

    Date posted: November 16, 2018.  Answers (1)

  • The trial balance of Zach Ltd. as at 31 December 1999 was as follows:(Solved)

    The trial balance of Zach Ltd. as at 31 December 1999 was as follows:
    Fa12008.png

    Additional information:
    1. Stock at 31 December 1999 was Sh.360,000.
    2. Sales returns of Sh.20,000 have been entered in the sales day book as if they were sales.
    When this error was discovered, the debtors account had been corrected but the sales figure
    was not rectified.
    3. 5000 new shares were issued during the year at Sh.32. The proceeds have been credited to
    the suspense account.
    4. A fully depreciated plant which cost Sh.200,000 was sold during the year. No other entries except
    bank have been made. The remaining balance on the suspense account after (2 and 3) above
    represents the sale proceeds.
    5. A debtor of Sh.20,000 has been declared bankrupt. A general provision is required at 5% of
    debtors.
    6. Rates of Sh.30,000 paid in December covering half year to 31 March 2000 have not been
    entered in the books.
    7. Debenture interest has not been paid.
    8. Depreciation on plant is at 10% on cost and buildings at 2% on cost.
    9. The directors propose to pay a dividend of Sh.2 per share and transfer Sh.20,000 to the
    general reserve.
    10. Corporation tax at a rate of 32'/2% on profits is estimated to be Sh.90,000.
    Required:
    (a)Suspense account for the year ended 3I December 1999
    (b)Trading,profit and loss account for the year ended 31 December 1999.
    (c) Balance sheet as at 31 December 1999.

    Date posted: November 15, 2018.  Answers (1)

  • a) Internal control systems are designed, amongst other things, to prevent error and...(Solved)

    a) Internal control systems are designed, amongst other things, to prevent error and misappropriation.
    Required:
    Describe the errors and misappropriations that may occur if the following are not properly controlled: (i) Receipts paid into bank accounts;
    ii)Payments made out of bank accounts; (iii) Interest and charges debited and credited to bank accounts.

    (b) A book-selling company has a head office and 25 shops, each of which holds cash (banknotes, coins, and credit card vouchers) at the balance sheet date. There are no receivables. Accounting records are held at shops. Shops make returns to head office and head office holds its own accounting records. Your firm has been the external auditor to the company for many years and has offices near to the location of some but not all of the shops.
    Required:
    List the audit objectives for the audit of cash and state how you would gain the audit evidence in relation to those objectives at the year-end.

    c) The external auditors of companies often write to companies’ bankers asking for details of bank balances and other matters at the year-end.
    Required:
    Explain why auditors write to companies’ bankers and list the matters you would expect banks to confirm.

    Date posted: May 11, 2018.  Answers (1)