IGCSE Accounting Paper-2: Specimen Questions with Answers 155 - 156 of 189

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Passage

Pihu Jaiswal opened a laptop shop on 1 Jan 2020 with the following assets:

Pihu Jaiswal Opened a Laptop Shop on 1 Jan 2020
$
Freehold shop premises45000
Stock of laptop10000
Cash (paid into a business bank account)4000

Pihu obtained a loan of $ 12000 from her friend, Komal on the same date and paid this into the bank account.

Question 155 (5 of 5 Based on Passage)

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Write in Brief

One Liner▾

If error (I) above is not corrected, what are the effects on: (Marks 2)

(I) Polly՚s Trading and Profit and Loss Account,

(Marks 2)

Explanation

Purchases will be overstated and it will lead to understatement of the Gross Profit as well as the Net Profit.

In error I, a capital expenditure is treated as a revenue expenditure. When a capital expenditure is treated as a revenue expenditure, two things happen-

  • Profits are understated because of increased revenue expenditure and Assets are also understated because these are only recorded in Trading & Profit & Loss A/c and not in the balance sheet.
  • Depreciation is not charged on the asset purchased.

Question 156

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Write in Short

Short Answer▾

Name the accounting concept which states that accounting practices should not change from year to year (Marks 1)

Explanation

Consistency Concept

  • Consistency Concept says that accounting methods and principles once adopted should be followed CONSISTENTLY over subsequent years.
  • That is they should not be changed from year to year because if they are changed, the financial statements of a number of years cannot be compared and we cannot easily see the trends of the performance, profitability or position of business.
  • For Ex- If in the first year of business one uses diminishing balance method to depreciate the fixed assets while in the second year he uses straight line method, then the net profit of the two years cannot be compared.

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