RMIT Classification: Trusted

Topic two questions

1. Identify and state two generally accepted accounting principles that relate to adjusting the
accounts.

The accounting principles and the qualitative characteristics, together with accounting standards,
are collectively referred to as Australian generally accepted accounting principles (GAAP). Generally
accepted accounting principles that pertain to adjusting the accounts include.

The revenue recognition criteria which state that revenues should be recognised in the time period
in which it is that any future economic benefits associated with the revenue will flow to the entity
and the revenue can be reliably measured.

The expense recognition criteria which state that expenses should be recognised when the out flow
of future economic benefits associated with the expense is probable and the expense can be
measures reliably.

2. Explain the differences between depreciation expense and accumulated depreciation.

Depreciation expense is an expense account whose normal balance is a debt. This account shows
the cost that has expired during the current accounting period. Accumulated depreciation is a
contra asset account whose normal balance is a credit. The balance in the account is the
depreciation that has been recognised from the data of acquisition to the reporting date.

3. In its first year of operations, Tang Pty Ltd generated $78,000 for services provided, $12,000
of which was on account and still outstanding at year-end. The remaining $66,000 was
received in cash from customers. The company incurred operating expenses of $45,000. Of
these expenses, $40,500 were paid in cash; $4,500 was still on account at year-end. In
addition, Tang Pty Ltd prepaid $6,500 for insurance coverage that would not commence until
the second year of operations.

Required

(a) Calculate the first year’s profit under the cash basis of accounting and calculate the first
year’s profit under the accrual basis of accounting.

Cash basis Accrual basis

Revenue 66,000 78,000
Expenses 40,500 45,000
Insurance 6,500 0
Profit 19,000 23,000

(b) Which basis of accounting (cash or accrual) provides more useful information for decision
makers?
 RMIT Classification: Trusted

Both accrual basis and cash basis provide useful information. However it can be argued
that the accrual
 RMIT Classification: Trusted

4. Identify accounting concepts, principles, criteria and constraints.

LO2 These are the concepts, principles, criteria and constraints discussed in this and
previous chapters:

1. Accounting entity concept.

2. Accounting period concept.
3. Cost principle.
4. Expense recognition criteria.
5. Full disclosure principle.
6. Going concern principle.
7. Materiality.
8. Monetary principle.
9. Revenue recognition criteria

Select from above

(a) Is the rationale for why plant assets are not reported at liquidation value. (Do
not use the cost principle.)
(b) Indicates that personal and business record keeping should be separately
maintained.
(c) Ensures that all relevant financial information is reported.
(d) Assumes that the dollar is the ‘measuring stick’ used to report on financial
performance.
(e) Requires that accounting standards be followed for items that are reasonably
expected to affect decisions.
(f) Separates financial information into time periods for reporting purposes.
(g) Requires recognition of expenses when the flow of economic benefits from the
entity is probable and able to be reliably measured.
(h) Indicates that market value changes subsequent to purchase are not recorded in
the accounts.

5. An entity recognised some expenditure as an expense, but the future benefits have not
expired.
Indicate which of the following accounts is debited and which is credited in the adjusting
entry: (a) asset, (b) liability, (c) revenue or (d) expense.
DR ?
CR ?

ACCESS the Excel file in Canvas

Artefacts 3.1 to complete the final
exercise for topic two.