Accounting Chapter 1 Assignment

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Question 1

(a)(i) Historical Cost
The historical cost concept can be defined as assets and liabilities that must be recorded at historical cost which is the fair value of the given acquired item at the time of acquisition or the amount of proceeds received in exchange for the obligation at the time of the transaction. Example:

1. One month ago, Company ABC purchased 10 units of an item at RM12 per unit. The price today is RM13 per unit. Using the historical cost concept, the inventory shall appear on the balance sheet with the price of RM120 and not RM130. (ii) Prudence

The prudence concept which is also known as the conservatism concept can be defined as precautions taken by accountants and entities when making a judgement as to not overstate assets and profits as well as not understate liabilities and losses to ensure the reliability of information. Example:

1. Company ABC records its inventory at net realizable value rather than then expected selling price. (iii) Dual Aspect
The dual aspect concept can be defined as every transaction having a minimum of two entries into the accounting system. One represented by the assets of the enterprise and the other by the claims against it. Should there be a debit entry then there must be a credit entry as well. Due to this concept, the accounting equation ‘Asset = Equity + Liability’ is formed. Example:

1. Company ABC made payment of salary RM5000 by cheque to its staff. Using the dual aspect concept, the transaction will be accounted as follows:

Account Title
Debit (RM)
Credit (RM)
Salary Expense
5,000

Bank

5,000

Question 1

(b)(i) Historical Cost

Should the historical cost concept be violated, users who are making economic decisions will not be able to make a fair comparison between two sets of economic data. As well as the information provided by the entity will not be reliable.

(ii) Prudence

If the prudence concept is violated, information, financial statements...
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