Task 1B - Accounting Principles Solutions
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This document discusses accounting principles and how they apply to valuation of assets in a business's balance sheet. It provides examples of how a business owner, Rod, has breached some key accounting principles: - Historical cost principle requires assets be valued at their original purchase price. Rod's properties should be valued at $470,000 and $250,000. - Conservatism principle means losses are recorded early and gains only when realized. Rod's properties should be valued at $420,000 and $250,000. - Reporting period principle means profits are calculated at the end of each 12-month period. Rod has breached this by not doing annual calculations. - Entity principle means each business
Task 1B - Accounting Principles Solutions
- 1. VCE ACCOUNTING UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS CHAPTER 1 – THE NATURE OF ACCOUNTING © Michael Allison Author’s express permission required for external or professional use Page | 1 Task 1B Accounting Principles Question 1 a) Explain the value at which each building should be valued in the Balance Sheet according to the Historical Cost Principle. Explanation Define 1 mark All transactions must be recorded at their original cost (purchase price). Relate In this case: 1 mark The Balwyn property must be valued at the 2010 purchase price of $470,000. 1 mark The Richmond property must be valued at the 2003 purchase price of $250,000. 3 marks b) Explain the value at which each building should be valued in the Balance Sheet according to the Conservatism Principle. Explanation Define 1 mark Caution must be used when preparing accounting reports so that: Losses are recorded when they are expected. Gains are recorded only when they are certain. Relate In this case: 1 mark The Balwyn property should be valued at $420,000 as this recognises an expected loss of $50,000 from the original purchase price. 1 mark The Richmond property should be valued at $250,000 as the $290,000 gain in value to $540,000 is not certain as it has not yet occurred. 3 marks
- 2. VCE ACCOUNTING UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS CHAPTER 1 – THE NATURE OF ACCOUNTING © Michael Allison Author’s express permission required for external or professional use Page | 2 Question 2 a) Explain how Rod has breached an Accounting Principle. Accounting Principle 1 mark Reporting Period Explanation Define 1 mark The life of the business must be broken into periods of equal length of no longer than 12 months. At the end of each period, the firm’s must calculate profit by matching revenues and expenses. Relate 1 mark In this case, the owner has breached this principle by not: Breaking the life of the firm into periods of no more than 12 months. Calculating profits at the end of each reporting period. 1 + 2 = 3 marks b) Explain how Rod has breached an Accounting Principle in this situation. Accounting Principle 1 mark Entity Explanation Define 1 mark The transactions and financial reports of each business should be kept separate from those of the owner’s other businesses. Relate 1 mark In this case, Rod has breached this by: Combining the financial reports of each firm instead of producing separate reports. Paying the phone bill of both firms from the bank account of Rod’s Racers. 1 + 2 = 3 marks
- 3. VCE ACCOUNTING UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS CHAPTER 1 – THE NATURE OF ACCOUNTING © Michael Allison Author’s express permission required for external or professional use Page | 3 c) Explain how Rod should value these vehicles in the Balance Sheet according to the Consistency Principle. Explanation Define 1 mark The accounting methods used by the business should be applied consistently from one reporting period to the next. Relate 1 mark In this case, because the business has always written down the value of stock to its current market value, Rod must value the vehicles at the $25,000 market value. This is will consistently apply the same accounting method he has always used. 2 marks Total /14 marks