South Eastern Kenya University

DAC 201 Accounting for Assets CAT marking scheme

a) Identify FOUR fundamental criteria you need to consider in order to make the decision on
whether or not to recognize an element of financial reporting.

i) An asset is recognised in the balance sheet when it is probable that the future economic
benefits will flow to the entity and the asset has a cost or value that can be measured reliably.

ii) A liability is recognised in the balance sheet when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present obligation and the
amount at which the settlement will take place can be measured reliably. (1 Mark)

iii) Income is recognised in the income statement when an increase in future economic
benefits related to an increase in an asset or a decrease of a liability has arisen that can be
measured reliably. This means, in effect, that recognition of income occurs simultaneously
with the recognition of increases in assets or decreases in liabilities (for example, the net
increase in assets arising on a sale of goods or services or the decrease in liabilities arising
from the waiver of a debt payable). ( 1 mark)

iv) Expenses are recognised when a decrease in future economic benefits related to a decrease
in an asset or an increase of a liability has arisen that can be measured reliably. This means,
in effect, that recognition of expenses occurs simultaneously with the recognition of an
increase in liabilities or a decrease in assets (for example, the accrual of employee
entitlements or the depreciation of equipment) (1 mark)
 b) Use any TWO examples to explain the meaning and impact timing differences with
reference to accounting for cash.

Timing difference refers to the intervals between when revenues and expenses are reported
for financial statement and income tax reporting purposes. This can be caused by time
difference between deposits made by the account holder and a banks recording of the same
ransaction, among other causes that include: (2 marks)

i) Uncredited cheques/Cash in transit- understates the bank statement balance ( 2 marks)

ii) Unpresented cheques – overstates the bank statement balance( 2 marks)
iii) Direct credits – understate the cash book balance( 2 marks)
iv) Standing orders- understate the cash book balance( 2 marks)
( any 2= 4 marks)

c) With an example in each case, differentiate between accounting concepts or accounting

assumptions and accounting principles

Accounting concepts are the fundamental accounting assumptions that act as a foundation
for recording business transactions and preparation of final accounts. (2 marks)

Accounting conventions are the methods and procedures which have universal acceptance
(GAAPS) (1 mark)

An accounting principle is the standardized rule set forth by a governing body, an

accounting (IFRS) (1 mark)

An accounting policy is the method or guideline used by management to adhere to the rule
and generate financial statements (1 mar)

(Total 15 marks)