question archive A friend has recently opened a business entity
A friend has recently opened a business entity
Subject:BusinessPrice: Bought3
A friend has recently opened a business entity. Not being conversant with accounting, he has decided to discuss some issues with you. In the course of the discussion, he brought up the following points: a) If the statement of profit or loss of a business reports a profit for the period, the business must have made some money, which will be reflected in the bank account. Is this always the case? (5 marks) b) Why is a business treated as a separate business entity for accounting purposes? (3 marks) c) Given that assets have economic value and that they have debit balances, why do expenses also have debit balances? (3 marks) d) If a business records revenue in advance by crediting a liability account rather than a revenue account, will there be any difference in the information presented in the financial statements? (3 marks) e) Auto-Mobile services a car on 31 July. The customer picks up the car on the 1August and sends a cheque on the 5 August. Auto-Mobile receives the cheque on the 6 August. When should Auto-Mania show revenue and why? (3 marks) f) He would like to expand his business and approaches Stand – Alone Bank for a loan of R50 000. The loan was approved and He was informed by his financial advisor that his liabilities have now increased. He has no accounting knowledge and has approached you to clarify this. (Explain using AC000) (4 marks) g) The owner of a business recorded the payment the payment of insurance for the month of January, in the accounting records of the business by decreasing the bank account by R1 560 and increasing the expense account of insurance by R1 560. However R1 560 is the payment for the year. Discuss whether the accounting treatment relating to the payment to the insurance company is correct.
