accounting assignment

The first transaction applies to “money measurement” concept, but it is not compliance. Because the employees have been included in the financial statement as on asset. It occurs normally because if employees work very well, their monetary value will be increasing. But they are included in an asset is good for company. So many financial statements normally include employees. Therefore, this example is different between money measurements concept, because money measurement concept applies most employees but this example applies key employees. This concept can never tell us everything such as business has good or bad managers, whether there are serious problems with the workforce, however, if only key employees included in financial statement, everyone can know who is the good manager. The second transaction applies to “Going concern” concept, but it has been violated. The company recently purchased an electronic fax machine worth $500, they have included that in the balance sheet as a fixed asset. However, the machine worth is not going to concern, the really concern is the cost price. So the company should count the fax machine cost less accumulated depreciation as their fix assets, is not count the machine worth. This concept implies that the business will continue to operate for the foreseeable future. It assumes that the owners of a company intend to continue its trading over the long term (at least 12 more months). It that is not the case, they will need to disclose that fact and present slightly different financial statements. The third transaction applies to “Prudence” concept, but it has been diso beyed, because the company should not overstate their income. Although, the lawyers are confident that the company will get the compensation ($1,000,000) within six months, but this is not really received. So the company must not include this as an income in their financial statements of the current year. If the company assuredly gets the compensation, they can include this as their income. This concept guides the accountants should make sure that assets and income are not overstated and liabilities and expenses are not understated. When they make a judgment, they need to be cautions and prudent. The fourth transaction applies to “Substance over form” conc ept, but it is not compliance. Because the company has recently acquired a machinery for $200,000 on hire purchase, it has paid machinery on hire purchase, from a legal point of view, the machinery does not belong to the company until all the hire purchase instalments have been paid, and an option has been taken up whereby the company takes over legal possession of the machinery. So the company has not included this machinery in their financial statements. This concept guides that must be accounted for and presented in accordance with their substance This concept guides that must be accounted for and presented in accordance with their substance and economic reality and not merely their legal form. When the all money are paid by the company that can included this machinery in their financial statements. For example: With Hire Purchase agreements we pay a hire fee for an agreed period, then there is the option at the end of the lease to purchase the asset and take ownership. Yet when we prepare the accounts, we record the asset from the start of the agreement and treat the hire fees as a liability and not an expense. This is the classic example of substance over form. Another example is goods bought on credit. You will notice that many invoices carry the legal disclaimer …title of these goods shall not pass until payment has been received in full?. Yet in the accounts, the goods are ours as soon as we receive them and NOT when we pay for them. The …substance? of the transaction is that the goods are ours, even t hough the legal …form? differs. The fifth transaction applies to “C onsistency” concept, but it has been disobeyed, the concept of consistency means that accounting methods once adopted must be applied consistently in future. Also same methods and techniques must be used for similar situations. It implies that a business must refrain from changing its accounting policy unless on reasonable grounds. If for any valid reasons the accounting policy is changed, a business must disclose the nature of change, the reasons for the change and its effects on the items of financial statements. Consistency concept is important because of the need for comparability, that is, it enables investors and other users of financial statements to easily and correctly compare the financial statements of a company. So if the company is charging depreciation using the straight line method, they must stick with the straight line method. Examples 1.Company A has been using declining balance depreciation method for its IT equipment. According to consistency concept it should continue to use declining balance depreciation method in respect of its IT equipment in the following periods. If the company wants to change it to another depreciation method, say for example the straight line method, it must provide in its financial report, the reason(s) for the change, the nature of the change and the effects of the change on items such as accumulated depreciation. 2.Company B is a retailer dealing in shoes. It used first-in-first-out method inventory valuation in respect of shoes at Branch X and weighted average inventory valuation method in respect of similar shoes at Branch Y. Here, the auditors must investigate whether there are any valid reasons for the different treatment of similar inventory located at different locations. If not, they must direct the company to use any one of the valuation method uniformly for the whole class of inventory.