Unit 3.4 Chp 1-4

22 UNIT 3 FINANCIAL ACCOUNTING FOR A TRADING BUSINESS
Where have we been?
• The purpose of Accounting is to provide financial information to assist decision-making.
• The Accounting process involves collecting source documents, recording financial data and then
reporting financial information, and subsequently advising the owner on an appropriate course of action.
• Accounting assumptions are the generally accepted rules governing the way Accounting information is
generated, and include:
– Accounting entity assumption
– Going concern assumption
– Period assumption
– Accrual basis assumption.
• Qualitative characteristics are the qualities we would like our financial reports to possess, and include:
– Relevance
– Faithful representation
– Verifiability
– Comparability
– Timeliness
– Understandability.
• The three general-purpose Accounting reports are the Cash Flow Statement, the Income Statement and
the Balance Sheet.
• The Elements of the Accounting reports are assets, liabilities, owner’s equity, revenue and expenses.
Exercises
Exercise 1.1
W B page 3
Accounting assumptions
In each of the following situations, identify the appropriate Accounting assumption and explain how it should
be applied.
a Rhonda recorded the payment of her daughter’s orthodontist’s fees as a business expense.
b Falcon Cosmetics has decided to report in its Balance Sheet the amounts it still owes for goods
purchased last month.
c Because some sales contracts cover a long period of time, Roberts Records only prepares financial
reports every two years.
d Mason Manufacturing sold goods on credit but decided to wait until the cash was received before
recording the sales as revenue.
e Richmond Spare Parts values its assets at what they would realise if they were all sold on the day the
reports are prepared.
f Casee is the owner of CG Industries and paid for petrol for her business car using her own cash.
g Galvin Plastics received cash as a deposit on a sale of goods but did not report it as revenue.
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