Essay Example on Accounting Concepts

The proprietor of a business withdraws number of items valued at cost price of OMR 10, from his stock to give to a friend. Which accounting concept would apply in this situation and how would this be reflected in the accounts?

Accounting concepts and principles refer to the wide spectrum of conventions designed to render a basic framework for financial reporting. In the above case which involves a proprietor of an enterprise withdrawing a number of items valued at cost price of OMR 10 from the stock and giving it to a friend, the transaction of such a nature is taken be drawings. While considering this factor, it is important to differentiate the nature of the drawings since a drawing can be for business purpose or for personal use. Taking out stock for business purpose involves using the stock of the business to conduct other business related transactions which are revenue generating. When stock is taken out for personal use, it is absolutely an expense to the essence that it does not lead to generation of additional revenue but rather used for private use. In the above scenario, it is not clear the motive of giving stock to the friend but ideally, the assumption is that it is for personal purposes and as such, it is treated as drawings. The accounting concept which relates to the above situation is:

Business entity concept/economic entity concept/accounting entity concept

Ideally, the enterprise and the shareholders are separate entities and apart from being distinct, they are treated separately in terms of their related financial transactions. The economic entity concept postulates that the transactions of the enterprise are kept far away from its owners. Ideally, this concept provides that there should be no mixing of personal and business transactions in the financial statements of the company. In this case, the business being a separate legal entity, it categorizes transactions in terms of assets, liabilities and equity. The standard accounting transaction is given by Assets = Liabilities + Equity. Drawings in this case, decreases the drawings and therefore it is subtracted from the equity.

How it would be reflected in the accounts.

To account for drawings, the journal accounts will be used to show the effect of the account. In this case, the accounts affected will be the drawings account and the purchase stock account. While the drawings account will be debited with the amount to show that the stock was drawn from the account, the purchased stock account will be credited at the cost price implying that there is stock which has gone out of the business and since it is not sold, sales cannot be credited.

Journal entries

Drawings a/cxxx

Purchase a/cxxx

Compute drawings during the period

31ST Dec 2015 Net Assets = OMR 5,000

31st Dec 2016Net Assets = OMR 6,250

Profit for the year was OMR 4,000

Compute drawings during the period

Increase in net assets = capital + profit drawings

Increase in net assets = OMR = (6,250-5,000)

Increase in net assets = OMR 1,250

Capital = 0

Increase in net assets = capital + profit drawings

1,250 = Capital + 4,000 drawings

Drawings = 4,000 1,250

Drawings = OMR 2,750

Equation applicable and why?

The applicable equation in this case is the Increase in net assets = capital + profit drawings. The standard accounting equation is given by Assets = Liabilities + Equity. However, in this case, drawings and profits are incorporated and both affect Equity. In this case, the incremental net assets formula is ideal for use in this scenario as it splits up the accounting formula and incorporates the profits and drawings.

Question 2

Meaning of each accounting concept with example

The accounting provisions ought to be strictly followed while accounting for all transactions in the financial statements. More often than not, while seeking to establish a strong solid foundation on the accounting system in place in an organization, a firm will tend to borrow from the principles of accounts especially with regards to the accounting concepts. Ideally, there are four basic accounting concepts which include. Ideally, there are several accounting concepts in place such as:

Accrual concept. Primarily, this concept provides that revenues are recognized as soon as they are earned while expenses are acknowledged after consumption of assets. Thus, revenues and expenses are accounted for as soon as they are incurred and not at the instance which cash is received or paid out.

Consistency concept. Ideally, this concept is one which posits that when an accounting is selected, the method should be used at all times unless there are provisions not to use the method.

Going concern. In this concept, the business enterprise for which accounts are being prepared exists in a condition considered good and will consequently continue to be in operation in the foreseeable future. A business enterprise for example which makes investments in the form of fixed assets and only the depreciation of the assets in the profit and loss account is booked and not the difference of acquisition cost of assets less the net realizable value of the assets. The reason behind this is that, assets are utilized to earn profit in the future.

Prudence concept. It is also referred to as conservation concept. From this concept, revenues and profits are incorporated in the balance sheet at the instance which they are realized or when there is a reasonable certainty of recognizing the item. As for liabilities, they are recognized when there exist a reasonable possibility of incurring them.

Cost concept. In this accounting concept, any form of manipulation of accounts is curbed while taking into consideration the net realizable value or the market value. By doing so, the cost concept ignores the inflation effect existing in the market.

Dual aspect concept. For every transaction, there are two accounts affected. While one is debited, the other account is credited. Thus, the dual aspect concept recognizes the double entry aspect in completing financial transactions. The total of the debit side should always be equal to the credit side. Thus, each financial transaction that a company undertakes involves a dual concept where the company obtains a benefit and pays for the benefit.

A good example would be buying stock. Ideally, this action has two effects whereby, the value of stock (asset to the company) will definitely increase while the liability inform of creditors will also increase.

Accounting period concept. Simply put it that, revenue expenditure and capital expenditure from this concept are segregated. While revenues expenditures are debited in the profit and loss account in order to ascertain the accurate amount of profit or loss incurred during the accounting period, the capital expenditure on the other hand is categorized under expenses, the benefit of which is utilized in the future accounting periods as well. The accounting period concept therefore helps the firm to establish the correct position of the enterprise at regular intervals of time especially at the end of each accounting period.

Matching concept. The matching concept is based on the accounting period concept in which the expenses of the firm for a particular accounting period are matched with the revenue of the similar accounting period in order to establish the accurate profit or loss that the firm has attained during the period. For example, while matching the expenses and revenues of an accounting period, the total sum of credit purchase totals as well as the outstanding expenses of the accounting period are summed up in order to come up with the correct profit for a certain accounting period.

Objective evidence concept. From this concept, financial entries are supported by some objective evidence. Purchase for example ought to be supported by purchase bills, sale with sale bills, cash payment of expenditures with cash memos and payment to creditors with cash receipts and bank statements. Stock on the other hand should be evidenced by the physical verification and the amount should be equal to what is included in the purchase bills. When the supporting bills are absent, there is lack of trust and the susceptibility of fraudulent manipulation of accounts increases.

Accounting equation. Ideally, this concept stems from the popular accounting equation which provides that total assets are equivalent to total liabilities plus the owners equity.

Money measurement concept. From this concept, only quantifiable transactions in terms of monetary value are incorporated in the transactions.

Example: Take for example a scenario where an enterprise has stocks in the accounting record. There is need to take the value of coats and jackets in monetary form.

Describe the treatment of outstanding expenses and prepaid expenses with the examples

Outstanding expenses are the expenditures which are incurred and consumed over the accounting tenure and though they stand due for payment but are yet to be paid ( ). The outstanding expenses are also known as accrued expenditures and they are recorded in the books at the end of the accounting cycle in order to reflect the true position of the business.

Prepaid expenses on the other hand are expenses whose amounts have been settled prior to when they are due and the related benefits are yet to be consumed during the accounting period. The benefits of the expenses are carried forward to the next accounting period.

Some of the best epitomes of outstanding expenses may include, outstanding salary, rent etcetera. Prepaid expenses may include prepaid salaries, rent, wages, insurance, rates etcetera.

To account for the outstanding expenses, they are shown on the liability side of the balance sheet. The corresponding journal entries of outstanding expenses for example are as follows:

Expense a/cDebit

Outstanding expense a/cCredit

As for the prepaid expenses also known as the expenses paid in advance or unexpired expenses, they are recorded in the category of the asset side of the balance sheet. They are accounted for as follows:

Prepaid expenses a/cDebit

Expenses a/cCredit

From the accrual concept, transactions recorded in the books of accounts during the period which they are incurred and not at the period when the actual cash amounts of cash equivalent are received or paid. In this case, payments are not paramount to be made immediately as they may be delayed or made in advance. The outstanding expenses and prepaid expenses are hence validated under the accrual concept. With regards to the matching concept, the total sum of credit purchase totals as well as the outstanding expenses of the accounting period are summed up in order to come up with the correct profit for a certain accounting period.

Question 3

Cash OMR 10,500

Account Receivable OMR 1,500

Office SuppliesOMR 750

Bridal DressOMR 63,000

Account Payable OMR 13,500

Share Capital OMR 62,250

Transactions in the Month of July 2016

Table of Assets, Liabilities and Owners equity in equation form

Assets = Liabilities + Capital (owners Equity)

Sony Bridal Material Amounts in OMR Assets = Liabilities Owner's Equity Date Cash + Accounts Receivable + Office Supplies + Bridal Dress Account Payable + Share Capital + Income and Expenses 1-Jul 10,500 + 1,500 + 750 + 63,000 13,500 + 62,250 + 2-Jul -7,500 + + + 7,500 + + Bridal Gowns

3-Jul 22,500 + + + + + 22,500 Hiring Income

4-Jul -1,500 + + + + + -1,500 Shop rent

5-Jul -1,200 + + + + + -1,200 Beautician salary

6-Jul 600 + -600 + + + + Collection from customer

7-Jul -300 + + 300 + + + Purchased office supplies

8-Jul + + + 3,000 3,000 + + Hair accessories on credit

9-Jul -1,500 + + + -1,500 + + Part payment for july 15 purchase

10-Jul -450 + + + + + -450 Paid electricity bill...