A-AS Level (CIE) Accounting Paper-2: Specimen Questions with Answers 23 - 24 of 53

Question 23

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Explain any assumptions of accounting

Explanation

  • Business Entity: The business is treated as distinct and separate from individuals who own or manage it. The entity concept requires that all the transactions are to be viewed, interpreted, and recorded from ‘business entity’ point of view. An accountant steps into the shoes of the business entity and decides to account for the transactions. The owner՚s capital is the obligation of business and it must be paid back to the owner in the event of business closure.
  • Going Concern Concept: The basic principle of Going Concern Concept is that business is assumed to exist for an indefinite period and is not established with the objective of closing it down. So, unless there is good evidence to the contrary, the accountant assumes that a business entity is a going concern- that it will continue to operate as usual for a longer period. It will keep getting money from its customers, pay its creditors, buy, and sell goods, use assets to earn profits in future.

Question 24

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Explain the accounting treatment of bad debts.

Explanation

Persons to whom goods have been sold on credit are known as debtors. Sometimes due to the dishonesty, death, or insolvency of a debtor, fill amount is not recovered from him. When it becomes certain that a particular amount will not be recovered from him. When it becomes certain that a particular amount will not be recovered is called bad debts. Bad debts are undoubtedly a loss to the firm and is therefore written on the debit side of the profit and loss account. If bad debts are given in adjustment, they will also be shown at one more place i.e.. , deducted from debtors on the assts side of balance sheet.

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