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
 
 
 
RM
 
 
RM
20X5
20X5
Jan 1
Bank
10,000
Dec 31
Balance c/d
10,000
 
 
 
20X6
20X6
Jan 1
Balance b/d
10,000
Dec 31
Balance c/d
10,000
 
 
 
20X7
20X7
Jan 1
Balance b/d
10,000
Dec 31
Balance c/d
10,000
 
 
 
20X8
20X8
Jan 1
Balance b/d
10,000
Dec 31
Balance c/d
10,000
 
 
 
 
Dt
Provision for Depreciation on Vehicle
Ct
 
 
 
RM
 
 
 
RM
20X5
20X5
Dec 31
Balance c/d
2,000
Dec 31
Profit & Loss A/C
2,000
 
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
 
 
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
 
6,000
 
 
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
 
8,000
Profit & Loss Account ( extract ) for the year ended 31 December
 
 
 
 
 
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
 
 
 
 
 
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
 
 
 
 
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.

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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 firm’s 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