IGCSE Accounting Paper-2: Specimen Questions with Answers 156 - 157 of 189

Question number: 156

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Short Answer Question▾

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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.

Question number: 157

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Short Answer Question▾

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Explain the straight line method of depreciation. Also show through an example how annual depreciation is worked out under this method. (Marks 4)

Explanation

Under straight line method, an equal amount of depreciation as a fixed percentage of the cost of the asset is charged to the P&L A/c over the years till the balance of the asset gets zero or reduced to its scrap value. The annual depreciation under this method is worked out through the following formula-

For Example, if a machine costing $4200 is estimated to have a life of 10 years and its scrap value is estimated to be $200 at the end of the tenth year. Then the annual depreciation on the machine would be

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