Balance Sheet and Accounting Principles Essay

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Exercise 1.1 Accounting principles a |Accounting principle |Entity |
|Explanation |The owner and the business are considered to be separate accounting entities, and their records should be|
| |kept on this basis. The orthodontist’s fees are an expense of the owner, not an expense of the business, |
| |and should be recorded as ‘Drawings’ |

b

|Accounting principle |Consistency |
|Explanation |The same accounting methods should be applied from one period to the next so that reports can be compared|
| |between periods. The owner will be unable to identify any changes in repair or vehicle expenses. |

c

|Accounting principle |Monetary Unit |
|Explanation |Transactions should be recorded in a common unit of measurement – in Australia, this means Australian |
| |dollars. |

d

|Accounting principle |Reporting Period |
|Explanation |The life of the business is divided into arbitrary periods to allow for reports to be prepared. The |
| |transaction should be recorded as revenue when it was earned (when the goods were supplied), i.e. in |
| |December 2014. |

e

|Accounting principle |Historical Cost |
|Explanation |Transactions should be recorded at their original purchase price as this value is verifiable by a source |
| |document. The revaluation is subject to subjectivity, and not verifiable. |

f

|Accounting principle |Going Concern |
|Explanation |The life of the business is assumed to be continuous, and its records are kept on this basis. The |
| |mortgage should be reported as a non-current liability, as it is assumed that the business will still be |
| |operating 10 years into the future. |

g

|Accounting principle |Reporting Period |
|Explanation |The life of the business is divided into arbitrary periods to allow for reports to be prepared. According|
| |to tax requirements, reports must be prepared at least yearly. |

Exercise 1.2 Accounting principles and qualitative characteristics a |Accounting principle |Entity

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