Concepts of Money Measurement

Concepts of Money Measurement Business Entity Concept can also be known as separate entity concept. A business entity concept is the financial activities are record distinct from the people who finance it such as owners, creditors, customers, and employers. The accounting records reflect the financial activities of a specific corporate entity. So, the business should separately from the proprietor or investor. When the profit is return in to the business, the profit must be taken into account. For example, the sole trader invests available funds in the market share account. These available funds are not affecting the financial status of the business itself. Money Measurement Concept Money Measurement Concept is expressed in monetary term. Every transaction is records in terms of money. If the transaction cannot be measured in monetary term, then the transaction cannot be taken into account. Going Concern Concept Going concern concept is the business that expected that a business will continue to operate its business for the next 12 months or next accounting period. This concept assumes that the business is going on steadily training for year to year without reducing its operation. When an enterprise liquidates or scale down a part of operation of the enterprise, the ability of the enterprise to continue as going concern concept is not impaired normally. Materiality Concept This materiality concept is refers to purposes paying attention to important events and ignoring insignificant accounting items as well as suggests small aster purchases or improvements should be initially written off as an expense. Prudence concept Prudence concept is taking a proper caution in measuring profit and income. Prudence must be exercised when preparing financial statements because of the uncertainty surrounding many transactions. In this concept, income should not be anticipated at all possible losses should be provided for. a.) Give FOUR reasons why depreciation may occur. The definition of the depreciation is refers to noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time and must be replaced once the end of their useful life is reached. The main reason of the depreciation is due to the physical wear and tear and the passage of time. For example, the value of the car is reduced over time as new model is introduced to the market, or the value of used motor vehicles is lower than a similar model but new motor vehicles. The second reason is obsolescence of the asset. For instance, the old machine in a factory is become more obsolescence due to time that the machine used. After many years, the value of the machine is depreciated because the residual or scrap value of the asset and similar new machine is come out in the market. The third reason is passage of time. Some assets diminish in value on account of sheer passage of time, even though they are not used. For example, the patent rights, copy rights and lease hold property. The forth reason is depletion of the asset. The depletion is to provide for the consumption on charge against earnings, based on the amount of wasting natural resources that are taken out of total available reserves during an accounting period. 2 b.) A firm buys a motor vehicles in January 20X5 for RM10,000. Calculate the annual depreciation for the first four years using. Reducing Balance Method, at an annual rate of 20%. Reducing Balance Method: Depreciation: Reduced Balance: Year 1 (20X5) 20% x RM 10,000 = RM 2,000 (RM 10,000 2,000) = RM 8,000 Year 2 (20X6) 20% x RM 8,000 = RM 1,600 (RM 8,000 1,600) = RM 6,400 Year 3 (20X7) 20% x RM 6,400 = RM 1,280 (RM 6,400 1,280) = RM 5,120 Year 4 (20X8) 20% x RM 5,120 = RM 1,024 (RM5, 120 1,024) = RM 4,096 Straight Line Method, if the vehicle is to be sold in four years time for RM2,000. Straight Line Method: Depreciation per year = = = RM 2,000 Dt Motor Vehicle account Ct ÂÂ   ÂÂ   ÂÂ   RM ÂÂ   ÂÂ   RM 20X5 20X5 Jan 1 Bank 10,000 Dec 31 Balance c/d 10,000 ÂÂ   ÂÂ   ÂÂ   20X6 20X6 Jan 1 Balance b/d 10,000 Dec 31 Balance c/d 10,000 ÂÂ   ÂÂ   ÂÂ   20X7 20X7 Jan 1 Balance b/d 10,000 Dec 31 Balance c/d 10,000 ÂÂ   ÂÂ   ÂÂ   20X8 20X8 Jan 1 Balance b/d 10,000 Dec 31 Balance c/d 10,000 ÂÂ   ÂÂ   ÂÂ   ÂÂ   Dt Provision for Depreciation on Vehicle Ct ÂÂ   ÂÂ   ÂÂ   RM ÂÂ   ÂÂ   ÂÂ   RM 20X5 20X5 Dec 31 Balance c/d 2,000 Dec 31 Profit Loss A/C 2,000 ÂÂ   20X6 20X6 Dec 31 Balance c/d 4,000 Jan 1 Balance b/d 2,000 Dec 31 Profit Loss A/C 2,000 4,000 4,000 ÂÂ   ÂÂ   20X7 20X7 Dec 31 Balance c/d 6,000 Jan 1 Balance b/d 4,000 Dec 31 Profit Loss A/C 2,000 6,000 ÂÂ   6,000 ÂÂ   ÂÂ   20X8 20X8 Dec 31 Balance c/d 8,000 Jan 1 Balance b/d 6,000 Dec 31 Profit Loss A/C 2,000 8,000 ÂÂ   8,000 Profit Loss Account ( extract ) for the year ended 31 December ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   20X5 20X6 20X7 20X8 Operating expenses : RM RM RM RM Depreciation of Motor Vehicle 2,000 2,000 2,000 2,000 Balance Sheet ( extract ) as at 31 December ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   20X5 20X6 20X7 20X8 Fixed Assets RM RM RM RM Motor Vehicle, at cost 10,000 10,000 10,000 10,000 Less : Provision for depreciation 2,000 4,000 6,000 8,000 Net book value 8,000 6,000 4,000 2,000 ÂÂ   ÂÂ   ÂÂ   ÂÂ   Calculate the cost of raw materials issued from the following data using : DATE PURCHASES SALES JAN 15 units x RM 10.00 FEB 10 units x RM 10.50 APRIL 20 units x RM 25.00 JUN 8 units x RM 11.00 AUG 10 units x RM 25.00 SEPT 20 units x RM12.00 NOV 13 units x RM 25.00 a.) LIFO method Date Purchases Cost of goods sold Balance Jan 15units x RM 10 15units x RM 10 = RM 150 Feb 10units x RM10.50 10units x RM 10.50 = RM 105 TOTAL 25 units @ RM 225 April 10units x RM10.50 10units x RM 10 10units x RM10.50 = RM105 10units x RM 10 = RM100 TOTAL 5 units x RM10 = RM 50 Jun 8 units x RM11 8 units x RM 11 = RM 88 TOTAL 5 units x RM10 = RM 50 8 units x RM 11 = RM 88 13 units @ RM 138 August 8 units x RM 11 2 units x RM 10 8 units x RM 11 = RM 88 2 units x RM 10 = RM 20 10 units @ RM 108 TOTAL 3 units x RM 10 = RM 30 Sept 20 units x RM 12 20 units x RM 12 = RM 240 TOTAL 3 units x RM 10 = RM 30 20 units x RM 12 = RM 240 23 units @ RM 270 Nov 13 units x RM 12 13 units x RM 12 = RM 156 Closing stock 3 units x RM 10 = RM 30 7 units x RM 12 = RM 84 10 units @ RM 114 Sales = ( 20 units + 10 units + 13 units ) x RM 25 = RM 1075 Cost of goods sold = (10units x RM10.50) + (10units x RM 10 ) + (8 units x RM 11 ) + (2 units x RM 10 ) + ( 13 units x RM 12 ) = RM 105 + RM 100 + RM 88 + RM 20 + RM 156 = RM 469 GROSS PROFIT =Sales Cost of Goods Sold = RM1075 RM469 = RM606 b.) FIFO method Date Purchase Cost of goods sold Balance Jan 15 units x RM 10 15 units x RM 10 = RM 150 Feb 10 units x RM 10.50 10 units x RM 10.50= RM 105 TOTAL 25 units @ RM155 April 15 units x RM 10 5 units x RM 10.50 15 units x RM 10 = RM 150 5 units x RM 10.50= RM 52.50 20 units @ RM 202.50 TOTAL 5 units x RM 10.50 = RM 52.50 Jun 8 units x RM 11 8 units x RM 11 = RM 88 TOTAL 5 units x RM 10.50 = RM 52.50 8 units x RM 11 = RM 88 13 units @ RM 140.50 August 5 units x RM 10.50 5 units x RM 11 5 units x RM 10.50 = RM 52.50 5 units x RM 11 = RM 55 10 units @ RM 107.50 TOTAL 3 units x RM 11 = RM 33 Sept 20 units x RM 12 20 units x RM 12 = RM 240 TOTAL 3 units x RM 11 = RM 33 20 units x RM 12 = RM 240 23 units @ RM273 Nov 3 units x RM 11 10 units x RM 12 3 units x RM 11 = RM 33 10 units x RM 12 = RM 120 13 units @ RM 153 Closing stock 10 units x RM 12 = RM 120 Sales = ( 20 units + 10 units + 13 units ) x RM 25 = RM 1075 Cost of goods sold = ( 15 units x RM 10 ) + ( 5 units x RM 10.50 ) + ( 5 units x RM 10.50 ) + ( 5 units x RM 11 ) + ( 3 units x RM 11 ) + ( 10 units x RM 12 ) = RM 150 + RM 52.50 + RM 52.50 + RM 55 + RM 33 + RM 120 = RM 463 GROSS PROFIT =Sales Cost of Goods Sold =RM1075 RM463 =RM612 c.) Average cost method Date Purchases Cost of goods sold Balance Jan 15 units x RM 10 15 units x RM 10 = RM 150 Feb 10 units x RM 10.50 10 units x RM 10.50 = RM 105 WAVCO 15 units x RM 10 = RM 150 10 units x RM 10.50 = RM 105 25 units @ RM 225 = RM 10.20 / units April 20 units x RM 10.20 20 units x RM 10.20 = RM 204 TOTAL 5 units x RM 10.20 = RM 51 Jun 8 x RM 11 8 units x RM 11 = RM 88 WAVCO 5 units x RM 10.20 = RM 51 8 units x RM 11 = RM 88 13 units @ RM 139 = RM 10.69 / units August 10 units x RM 10.69 10 units x RM 10.69 = RM 106.90 TOTAL 3 units x RM 10.69 = RM 32.07 Sept 20 units x RM 12 20 units x RM 12 = RM 240 WAVCO 3 units x RM 10.69 = RM 32.07 20 units x RM 12 = RM 240 23 units @ RM 272.07 = RM 11.83 / units Nov 13 units x RM 11.83 13 units x RM 11.83 = RM 153.79 Closing stock 10 units x RM 11.83 = RM 118.30 Sales = ( 20 units + 10 units + 13 units ) x RM 25 = RM 1075 Cost of Goods Sold = ( 20 units x RM 10.20 ) + ( 10 units x RM 10.69 ) + (13 units x RM 11.83 ) = RM 204 + RM 106.90 + RM 153.79 = RM 464.69 GROSS PROFIT =Sales Cost of Goods Sold = RM1075 RM 464.69 = RM 610.31 5a.) Explain clearly the difference between capital expenditure and revenue expenditure. Capital expenditure is acquired to be used in business operation to generate revenue for a period of more than one year. Capital expenditure is the money that spends on buying asset. For instance, office equipment and motor vehicle are the examples of the capital expenditure. Capital expenditure also can be considered as the useful economic life of the asset. Therefore, the expenditure incurred is allocated over the period it is used to match the revenue earned. On the other hand, revenue expenditure are incur in the current year in the business operation. The revenue expenditure is the expenditure on the wages, premises, and utility bills. Therefore, the revenue expenditure need to written off to the profit and loss account in the year in order to measure the profit or loss. This is an accounting concept termed matching and accruals concept. Revenue expenditure also is the money that spends to obtain the use of the asset and maintain the dairy operation of the business. b.) Classify the following items as capital or revenue expenditure. i .) Cost of new machinery Capital expenditure ii . ) Petrol and oil for the motor vehicle Revenue expenditure iii . ) Wages of office staff Revenue expenditure iv . ) Extension of factory Capital expenditure v . ) Repainting office Revenue expenditure vi . ) Cost of road tax and insurance for new van Capital expenditure vii . ) Cost of road tax and insurance for existing van Revenue expenditure viii . ) Repair and maintenance of existing van Revenue expenditure ix . ) Legal fees paid in connection with factory extension Revenue expenditure x . ) Cost of painting firms name on new van Capital expenditure Bibliography Internet sources Wikipedia 2009, Entity concept, 5 Dec, viewed by 3 July 2010 BusinessDictionary.com 2010, business entity concept, viewed by 18 June 2010 Tutor2u, accounting concept and conventions, viewed by 18 June 2010 Anil Kumar Gupta 2007, Depreciation, Causes of Depreciation, Need for Provision of Depreciation , 2 June ,viewed by 18 June 2010