Accounting principles and practices

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Answer 1

Difference between Financial Accounting with Management Accounting

Basis Financial accounting Management accounting

Reporting Financial accounting focuses on The major focus of management

focus creating financial statements of accounting is on preparation of
the entity which are to be shared operational reports to be shared
with the external stakeholders within the entity (Phuong, 2017).
and public.

Timing The financial reports under The management reports are

financial accounting are prepared prepared frequently in order to
at regular interval, generally a provide timely necessary
year (Weetman, 2019). information to managers.

Standard There are set accounting Management accounting reports

s standard for preparation of are prepared for internal
financial reports under financial consumptions thus there is not set
accounting. standard for preparation of these
reports.

Answer 2

Financial accounting assumptions

Accounting period assumption: the term “accounting period” in accounting refers to the
spam of time at the end of which the financial statements of the entity are prepared in
order to analyse the position of profit and loss and assets and liability of the entity at the
end of period. The financial statements are prepared are regular interval normally after a
period of one year.

Business entity assumption: the business is considered as the separate entity apart from
its creditors, owners and managers (Meyers, 2019). The transactions of the business are

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recorded from the business in the books of business. The owner or proprietor is also
treated as creditor of the business to the extent of his capital.

Answer 3

Accounting transaction is a business event which has monetary impact on the financial
statements of the business. Accounting transactions are recorded in the accounting
statements of business. In order to be an accounting event to be valid, it must have a
possible financial impact (Fengzhou, Shu and You, 2019). The accounting should be
related to a transaction or document and should contain link to its related transaction or
document.

1. This is a valid accounting transaction

2. This is not a valid accounting transaction since the transaction does not indicate the
amount of additional stock purchased by founder.
3. This is a valid accounting transaction
4. This is not a valid accounting transaction since the transaction does not mention the
amount of sewing machine which was purchased by the company.
5. This is a valid accounting transaction
6. This is not a valid accounting transaction since it does not mention the amount of
stock sold to another investor (Hua, 2016).
7. This is not a valid accounting transaction since it does not mention the name of
party to whom the fabric would be sold and amount of fabric sold.
8. This is a valid accounting transaction since it will have financial impact on clothing
limited and it contain all details required to record the transaction.

Answer 4

Part a: Accounting equation

Accounting equation: assets= capital + liabilities

s.no.

a. A Expense increases (insurance Asset decreases (prepaid

expense) insurance)

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b. B Liability increases ( outstanding Expense increases (capital
commission) decreases)

c. C Revenue decreases (sales in Liabilities increase (unearned

advance) revenue)

d. D Revenue decreases (sales) Liabilities increase (unearned

revenue)

e.

Part b: Journal entries

Particular Debit Credit

a. Insurance expired a/c dr. 4000

To prepaid insurance a/c 4000

(being expired insurance recorded)

Profit and loss a/c dr. 4000

To insurance expired a/c 4000

(being expired insurance transferred to profit and loss

account)

b. Commission expenses a/c dr. 9600

To outstanding commission a/c 9600

(being outstanding commission recorded)

Profit and loss a/c dr. 9600

To Commission expenses a/c 9600

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 (being Commission expenses transferred to profit and
loss account)

c. Sales a/c dr. 570

To unearned revenue a/c 570

(being income received in advance recorded)

d. Office supplies expense a/c dr. 900

To office supplies 900

(being stationery charged to the office supplies

account)

Office supplies a/c dr. 490

To office supplies expense a/c 490

(being $490 worth of stationery restored)

e. Interest expenses a/c dr. 250

To prepaid interest expenses a/c 250

(being last year prepaid expenses reversed)

Prepaid Interest expenses a/c dr. 250

To Interest expenses a/c dr. 250

(being prepaid Interest expenses recorded)

Answer 5

Part a: Adjusting entries

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Particular Debit Credit

Depreciation expense a/c dr. 3000

To accumulated depreciation a/c 3000

(being depreciation expenses transferred to

accumulated depreciation account)

Profit and loss a/c dr. 3000

To depreciation expenses a/c 3000

(being depreciation expenses transferred to profit and

loss account)

Insurance expired a/c dr. 450

To prepaid insurance a/c 450

(being expired insurance recorded)

Profit and loss a/c dr. 450

To insurance expired a/c 450

(being expired insurance transferred to profit and loss

account)

Profit and loss a/c dr. 2100

To accrued wages a/c 2100

(being wages earned by employees but not yet paid)

Profit and loss a/c dr. 3150

To income tax expenses a/c 3150

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(being income tax expenses recorded)

Income tax expenses a/c dr. 3150

To cash a/c 3150

(being income tax expenses paid in cash )

Stock a/c dr. 800

To profit and loss a/c 800

(being closing stock recorded)

Part b

Income statement

Particular Amount Particular Amount

To opening stock 1300 By service revenue 48000

To cost of goods sold 32900 By closing stock 800

To gross profit (b/f) 14600

48800 48800

To depreciation 3000 By gross profit 14600

To insurance expired 450

To accrued wages 2100

To income tax expenses 3150

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To net profit (b/f) 5900

14600 14600

Balance sheet

Liabilities Amount Assets Amount

Share capital 16000 Equipment 27000

Retained profit 16200 Other assets 5100

(10300+5900)

Accrued wages 2100 Stock 800

Accumulated 15000 Account receivable 7000

depreciation

Accounts payables 7500 Cash (19600-3150) 16450

Prepaid insurance 450

56800 56800

Part c: Closing entries

Particular Debit Credit

Service revenue a/c dr. 48000

To income summary a/c 48000

(being service revenue transferred to income

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summary account)

Income summary a/c dr. 42100

To supplies expense a/c 500

To cost of goods sold a/c 32900

To depreciation expenses a/c 3000

To insurance expired 450

To accrued wages a/c 2100

To income tax expenses a/c 3150

(being expenses transferred to income summary

account)

Income summary a/c dr. 5900

To retained earnings a/c 5900

(being income transferred to retained earnings

account)

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References

Fengzhou, W., Shu, H. and You, H., 2019. Discussion on the Basic Assumptions of
Management Accounting.

Hua, J., 2016, November. Influence of Electronic Commerce on accounting basic

assumptions. In First International Conference Economic and Business Management
2016. Atlantis Press.

Meyers, T.L., 2019. Accounting Assumptions and the Farm Business.

Phuong, N.T.T., 2017. The roles of information systems in linking management accounting
and financial accounting: Empirical evidence from Vietnam. Accounting and Finance
Research, 6(4).

Weetman, P., 2019. Financial and management accounting. Pearson UK.

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