Business Entity Assumption
Financial Accounting is a method by which an organisation and its accountants prepare the financial statements and analyses it to get useful information about the organization. It tells about the performance of the entity and the accuracy with which it is maintained.
Business entity Assumption is a principle assumption of accounting which states that a business entity is separate from its owners. The business entity has its separate financial status and position. This means that the books of accounts if the entity is different from the owners of the company even though the owners have given personal finances to the company.
The business entity and its owners are related and this cannot be changed. But the business entity assumption says that even though both are connected, they are considered separate from each other. This accounting assumption is applicable to all types of entities including sole proprietorship, partnership, companies. This helps the management to study the business separately regardless of the status of ownership of the company. It helps in avoiding duplicate entries.
Fixed Asset Register is book of account that belongs to an entity which contains a list of fixed assets. It is maintained in a written bookkeeping format that is maintained for the purpose of fixed assets.
The benefits of fixed assets register are the following:
- Helps in planning both short term and long term: It is a very important tool for planning. It helps in classification and categorisation of the assets at the time of impact analysis of the assessment of risk.
- Helps to prevent and detect frauds and errors: It is good internal control tool and thus prevents frauds.
- Helps to organise things in the organisation:It help to keep assets and other things organised in an organisation. It also helps in tracking the movement of the assets.
- Helps to save costs: It saves costs and creates creditability of the financial statement.
- Helps to ensure compliance: It helps in inspection of the assets and provides evidence. It a requirement of many banks to maintain records of assets in the entity.
- Helps in calculation of depreciation: depreciation can be easily computed using the fixed assets registers.
Journal is the most basic accounting of books. It is the primary book of entry of the transactions that occur in an organisation. The journal entries are not just recorded but it has to carry out in a systematic manner so as to ensure consistency. The journals follow the principle of double entry system of book of accounts.
The following are the functions of journal:
- It helps to analyse all the transactions by separating debit and credit so that the posting in the ledger can be done.
- It also helps in arrangement of all the transactions in a chronological order.
- It helps in integration of accounts. Journal entry for the sale of asset at loss is given below:
Bank Account -Dr
Loss on sale of Assets A/c -Dr
To Fixed Assets A/c
Unearned Income is also known as Deferred Revenue. When an entity receives a sum of money before it actually earns it, it is known as unearned income. Unearned income is considered as a liability for the entity and is also shown in the Liabilities side of the balance sheet. As soon as the income is actually earned the liabilities are reduced and the amount is transferred to the income account. For example: A person who owns a building and gives it on rent receives advance rent from the tenant. The advance is the earned income of the company as it has been received before it should be actually earned. The amount shall be taken to liabilities and should be transferred to Revenue account on the date it falls due.
Fixed Assets Register
As per the accounting principles, an income must be recorded in the books only when it is actually earned. If any amount if income is not sure to be earned in the current point of time, it should be even provisionally recorded in the books. As soon as there is a surety in the revenue, it can be recorded.
two examples of balance day adjustments that a company should record before the issue of the final financial report at the end of a accounting period are the following:
- An interest of $25,000 on a loan was earned at the end of the year but the collection of the amount was not due till the nest accounting year.
Adjustment entry:
Interest Receivable A/c -Dr 25,000
To Interest Income A/c 25,000
- Annual Depreciation on plant and machinery for an accounting period is estimated at $100,000
Adjustment entry:
Depreciation A/c -Dr 100,000
To Plant and Machinery A/c 100,000
- Why would a business determine an amount for “Doubtful Debts” and outline the steps that could be taken to calculate the allowance.
Creation of Doubtful Debts is one of the techniques of accounting of Bad Debts. Doubtful debts are the estimated amount of Bad debts. The debts which are still not sure to occur in the future are considered as doubtful debts. Since there is a probability of occurrence of such bad debts in the books, it is recognised in the books as per the accounting principle of recognition of expenses.
The steps to be followed in calculation of the Doubtful debt allowance are as follows:
Approach 1: income Statement or Sales Approach
Approach 2: Balance Sheet Approach
Income Statement or Sales Approach: under this approach, Bad Debts are calculated using a percentage of the sales of the company during a period of time. The company may estimate a certain percentage of credit sales to be irrecoverable during a period of time upon which the provision for doubtful debts is created.
Balance Sheet Approach: Under this approach, bad debts are calculates using a percentage of accounts receivable of the company during a period of time. The company estimates a certain percentage of accounts receivable to be irrecoverable and hence provision is created in the books for the same amount.
The journal entry in both the cases shall be:
Bad Debts A/c -Dr
To Allowance for Bad Debts A/cA. On 27 ofJune2012, the company paid last week’s wag Wages that are due and not paid:
- 28thofJune 1200
- 29th ofJune 1450
- 30thofJune weekend, no wages
- B. Rentpaidon 1/12/11 for one year $12,000 net of GST, the company accountant recorded all payment as expense on 1/12/1
- C. The companyis requiredto issue a bank guarantee for one year, bank withheld $20,000 on 31/12/2011 from the company bank account with interest of 4.5% that will be calculated monthly and will be paid at the maturity date.
- D. On 30/04/12,thecompany signed a monthly maintenance service contract for $500 each month; the company policy is to receive the 1st six months in adva The company received $3000 on 30th of April 2012. Company accountant recorded the following entry on the 30th of April:
- E. Accordingtothe balance sheet, the inventory was $223,500. At the end of the financial year stock take, you have been advised that the inventory value is only $210,000.
- F. On 30/06/2012,the company aged receivables whichhave a total of $306, The company estimated 2% of 90 days receivable and 10% of over 90 days will not be able to be collected.
Aged Receivable Summary 30/6/2013 |
||||
Total Due |
0-30 days |
31-60 days |
61-90 days |
91-120 days |
$311,400 |
$220,000 |
$60,000 |
$18,000 |
$16,400 |
. Prepare journal entries for disposal of fixed assets
- Company sold Equipmentworth $120,000 for $50,000. Depreciation recorded at the rate of 20% yearly for 3 years.
- Motorvehicle purchased for $80,000 was sold for $20,000 after usage of 2 years at rate of 25% yearl
On 1/12/ 2011, a company purchased a machine costing $1,750. It is expected to have 5 years estimated useful life and value of $250 at the end of the 5th year.
- Preparethe deprecation schedulefor the life of the asset.
- Recordthedepreciation journal entries at the end of financial year for year 1 only
Depreciation Schedule |
|
Particulars |
Amount |
Purchased Machinery |
1750 |
Less: Depreciation |
300 |
Balance |
1450 |
Less: Depreciation |
300 |
Balance |
1150 |
Less: Depreciation |
300 |
Balance |
850 |
Less: Depreciation |
300 |
Balance |
550 |
Less: Depreciation |
300 |
Balance / Salvage Value |
250 |
A business purchased cleaning equipment in 2008 for $8,500 and is depreciated by the double declining method for an expected life of 12 years. Original salvage value was estimated to be $2,500 at the end of 12 years.
- Preparethe deprecation schedulefor the life of the asset.
- What is the book value of the cleaning equipment at the end of 2014
Depreciation Schedule |
|
Particulars |
Amount |
Purchased Equipment |
8500 |
Less: Depreciation |
600 |
Balance |
7900 |
Less: Depreciation |
600 |
Balance |
7300 |
Less: Depreciation |
600 |
Balance |
6700 |
Less: Depreciation |
600 |
Balance |
6100 |
Less: Depreciation |
600 |
Balance |
5500 |
Less: Depreciation |
600 |
Balance |
4900 |
Less: Depreciation |
600 |
Balance |
4300 |
Less: Depreciation |
600 |
Balance |
3700 |
Less: Depreciation |
600 |
Balance |
3100 |
Less: Depreciation |
600 |
Balance / Salvage Value |
2500 |
machine costing $5,000 was purchased on 01/07/2011. The expected resale value at the end of its five-year useful life is $1,000.
- Prepare the depreciation schedule for the life of the asset.
- Recordthedepreciation journal entries at the end of financial year 30/06/2012.
Depreciation Schedule |
|||
Year |
Depreciable Base |
Depreciation Factor |
Amount |
1 |
4,000 |
5/15 |
1,333.33 |
2 |
4,000 |
4/15 |
1,066.67 |
3 |
4,000 |
3/15 |
800.00 |
4 |
4,000 |
2/15 |
533.33 |
5 |
4,000 |
1/15 |
266.67 |