Chapter 14 Concepts 1 Business entity concept I want to start a - - PDF document
BMS Chapter 14 Concepts 1 Business entity concept I want to start a business Resources Resources = + Resources in the supplied by the supplied by third Business owner parties The owner and the business are two separate entities.
I want to start a business Resources in the Business Resources supplied by the
Resources supplied by third parties
Assets = Capital + Liabilities The owner and the business are two separate entities.
Income statement
$ $
Sales 10,200 Cost of sales Opening inventory Purchases 8,900 Closing inventory (1,200) (7,700) Gross profit 2,500 Other Expenses Wages 170 Rent 80 Advertising 25 (275) Net profit 2,225 An item or transaction can be shown in financial statements if it can be measured in money terms only
Bought for $100,000 Today's value $250,000 Historic cost Revaluation Assets of the business should be kept at its original value (value at the date of purchase)
I can’t put my ideas into financial statements
The objective of financial statements is to show true and fair view to users. Therefore the financial statements should be prepared with the relevant rules, regulations, standards, laws etc… Someone's personal views can not be used when fianancial statements are prepared
Every transaction has double effect on the business.
Sale of goods on credit An income is realised when the right receive cash is established. Sales on credit is recognised as an income because the buyer agrees to pay for the goods.
Income statement for the year ended 31 Dec 2003
Statement of financial position as at 31 Dec 20X3
Any transaction or item can be recognised related to a time period
Electricity January $400 paid $250 Outstanding $150 January $150 February $400 paid $600 Overpaid $50 Income and expenses related to a period should be accounted in that particular period irrespective of whether they have been received or paid in cash.
Sales 10,200 Cost of sales Opening inventory Purchases 8,900 Closing inventory (1,200) (7,700)
Income statement
Income should be matched with the expenditure incurred to earn that income
This separately identifies the significant and insignificant items and transaction. Eg: Eventhogh the stationary items are non current assets by definition, they are charged in the profit or loss statement as expenses because they have a smaaler value
It is assumed that the currencies used to prepare financial statements are stable
A business continues its operations for the foreseeable future (at least another year)
Depreciate using reducing balance method Depreciate using Straight line method Similar items should be treated in a similar way.
Future losses should be recognised now. Future income should be recognised only when it is realised.