Question 1
(a) Business Entity Concept
The business entity concept also known as separate entity or economic entity concept. It lists the transaction which is related to a business, it must be recorded independently form those of the company’s owners and other business. Therefore, when recording the transactions of a company, only take those events that will effect the particular business. The events that do not effect our own business are not relevant and not included in the accounting records of the business. Business entity concept is very important if transactions of a business are mixed up with that of its owners or other businesses, the accounting information would lose its usability. For example, an owner of a company lends a loan to his company. It would be strictly recorded as company’s liability and that has to be paid back to the owner.
(b) Historical Cost
Accounting need to be concern about the past event and it have to be consistency and comparability. That is why it need the accounting transaction to be recorded in their historical costs. Historical cost is the value of a resource given up or a liability incurred to acquire an asset at the time when the resource was given up or the liability incurred. In subsequent periods when there is appreciation is value, the value is not recognized as an increase in assets value except where allowed or required by accounting standards. For example, 150 units of an item were purchased one month back for RM10 per unit. The price today is RM11 per unit. The inventory will show on balance sheet at RM1,500 and not at RM1,650.
(c) Dual Aspect Concept
Dual aspect concept, also known as Duality Principle. It is a basic business transaction records in the books of accounts. Every transaction has dual effect in this concept, it effects two accounts in their respective opposite sides. Other than that, the transaction should be recorded in two places. It means, both the aspects of the transaction must be recorded in the books of accounts. Dual aspect concept is the underlying basis for double entry accounting system. Double entry accounting system is based on the Dual Aspect Concept and was devised to account for all aspects of a transaction. Under the system, aspects of transactions are classified under Debit and Credit. Debit is the transaction that accounts for the increase in assets and expenses, and the decrease in liabilities, equity and income. Credit is the transaction that accounts for the increase in income, liabilities and equity, and the decrease in assets and expenses. For example, Mr. Ronnie purchased a second hand van for RM7,000 with cash. In the journal, the transaction should be recorded as:
Particulars
Debit
Credit
Dt. Van
7,000
Ct. Cash
7,000
(d) Going Concern Concept
The going concern concept of accounting means that the business entity will continue to operate in the future and will not liquidate or be forced to discontinue due to any reason. A company is a going concern if no evidence is available to believe that it will or will have to cease its operations in foreseeable future (usually seen as 12 months). The going concern concept lets the company to defer some of the prepaid expenses until future accounting periods. For example, a company closes one of its branch and continue with the other branch. The company is a going concern because the close down a part of business does not impair the ability of the company to operate as going concern.
(e) Matching Concept
The matching concept requires the revenues and any related expenses be recognized together in the same period. Therefore, if there is a cause and effect relationship between revenue and the expenses, record them at the same time. If there is no such relationship, then charge the cost to expense at once. This is one of the most essential concepts in accounting, since it mandates that the entire effect of a transaction be recorded within the same reporting period. For example, a salesman earns a 5% commission on sales shipped and recorded in May. The commission of $5,000 is paid in June. the commission expense should be recorded in May.
Question 2
(a) Trade discount is the discount that the seller gives to buyer at the time of purchase of goods, as a deduction in the list price of quantity sold. The trade discount is to attract more customers and encourage them to increase the purchasing quantity. For example, a furniture factory offers its reseller a 30% trade discount. The retail price for a chair is RM15. A reseller ordered 100 chairs, which the furniture factory grants a 30% trade discount. So the total retail price is RM1,500 deduct 30% (RM450), will be reduced to RM1,050. The amount after reduced the 30% will be the amount the furniture factory should bill the reseller. So the trade discount id RM450.
Cash discount is a discount given by the seller to the buyers at the time of making payment of purchases, as a reduction in the invoice price of the commodity. A cash discount is to encourage buyers the pay in cash and also avoid credit risks. For example, the payment is due in 45 days, the seller offered the buyer a cash discount, if they make the payment in the first 10 days.
There are differences between trade discount and Cash discount. Trade discount would not be record in the books as a discount for both the buyer and the seller and cash discount will be a proper record in the books of accounts for both the buyer and the seller. Other than that, trade discounts are valid for all customer, but cash discount only valid for customer who purchase in cash. A trade discount will show as a deduction in the invoice and a cash discount is not shown at all. The trade discount is given at the time of the purchase while the cash discount is given at the purchase is made.
(b) The accounting equation also known as the basic accounting equation, it forms the foundation for all accounting systems. Moreover, the whole double entry accounting concept is based on the accounting equation. This simple equation shows two facts about a company; what the company owns and what the company owes. The accounting equation, a company's assets equates its liabilities and equity. This shows all company assets are acquired by either debt or equity financing.
• Asset is a resource which owned or controlled by a company, it can be used for future benefits. Some assets are tangible like cash while others are theoretical or intangible like goodwill or copyrights. Example of asset, cash, accounts receivable, vehicles, buildings, prepaid expenses, goodwill, patents, copyrights.
• Liability is money that the company owed to other people or organization. Example of liability, account payable, long term loan, short term loan.
• Equity is a portion of a company’s assets owned by partners or shareholders. Once all of the liabilities are paid off, the remainder of assets will be owned by partners or shareholders. The owners can increase their ownership share by putting more money to the company or withdrawing company’s funds will decrease the equity. Similarly, revenues increase equity while expenses decrease equity. Example of equity, owner's capital, owner's withdrawals, revenue.
(c) Trial Balance is the list of closing balances of ledger accounts on a certain date. It is the first step of preparing financial statements. Usually prepared at the end of an accounting period to help in the preparation for financial statements. Ledger balances will be separated into debit balances and credit balances. Assets and expenses accounts show on the debit side of the trial balance. Liabilities, capital and income accounts show on the credit side. If all accounting entries are recorded correctly, the sum the trial balance will be equal for both debit side and credit side. The purpose of trial balance is to ensures the account balances are accurately extracted from accounting ledgers.
Statement of comprehensive income also known as Profit & Loss Account. It is a report of income, expenses and the resulting profit or loss earned during an accounting period. Statement of comprehensive income gives the basis for measuring performance of an entity over the course of an accounting period. It changes in sales revenue over the period and in comparison to industry growth.
Statement of Financial Position known as the Balance Sheet. It shows the financial position of an entity at a given date. It included of three main components: Assets, liabilities and equity. Statement of financial position allowed users to assess their financial health od an entity to avoid liquidity risk, financial risk, credit risk and business risk.
Relation of trial balance, statement of comprehensive income and statement of Financial Position. Trial balance is the first step of preparing the statements. Statement of Financial Position is directly related to statement of comprehensive income. All the amounts from Statement of Financial Position and statement of comprehensive income will refer to trial balance. Statement of comprehensive income report the profit or loss and it will apply in statement of financial position to get the value of the company.