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7. Accounting principles and policies

DANIYAL SIDDIQUI
7.1 Accounting principles

O/A level Accounting

Candidates should be able to explain and recognize the application of the
following accounting principles:
 matching
 business entity
 consistency
 duality
 going concern
 historic cost
 materiality
 money measurement
 prudence
 realization

7.2 Accounting policies

Candidates should be able to recognize the influence of international accounting
standards and under stand the following objectives in selecting accounting policies:
 comparability

 relevance
 reliability
 understandability

Matching Concept:
Profit is determined by matching revenue for the period against the expenses incurredin
earning that revenue. Revenue received and expenses paid that do not relate to the
period are excluded from financial position.
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Prudence Concept:

DANIYAL SIDDIQUI
Expenses should be recognized even if they are likely to be occurred and income when

O/A level Accounting

right of a receivable become established.

For example: doubtful debts, depreciation, no income would be recorded on basis of

prize bond or Lottery ticket.

Business entity concept:

Business is an separate entity from its owner personal transactions of the owner are not
recorded in the book of accounts.

Consistency Method:
Once in an accounting method has been chosen, that method should be used unless
there is a sound reason to do so.

Going Concern Method:

The business will be able to continue its operations in the foreseeable future. Assets will
be recorded in the balance sheet at their cost value method (Historical Cost) instead of
market value.

Money Measurement:
The accounting process records only activities that can be expressed in monetary terms.

Historical Cost:
It is the measured of value used in the accounting in which the price of an asset in the
statement of financial position is based on its original cost.

Materially:
Information in material if its omission or miss statement good influencer the economic
decision of user taken on the basis of the financial position.

Dual Aspects:
For every Debit there is a Credit account.
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Accounting Period Convention:

DANIYAL SIDDIQUI
Final accounts are prepared at the end of the accounting period i.e.Quarterly, half yearly

O/A level Accounting

or one year

Realization concept:
Revenue in recognized when goods are sold, either for cash or credit i.e. The debtor
accepts the responsibility to pay them.

Substance over form:

The information must be free of material error and bias, and not misleading. Thus,
the information should faithfully represent transactions and other events, reflect the
underlying substance of events, and prudently represent estimates and uncertainties
through proper disclosure.

Comparability
The information must be comparable to the financial information presented for other
accounting periods, so that users can identify trends in the performance and financial
position of the reporting entity
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Capital and revenue expenditure and receipts

DANIYAL SIDDIQUI
O/A level Accounting
 Distinguish between and account for capital expenditure and revenue
expenditure
 Distinguish between and account for capital receipt sand revenue receipts
 Calculate and comment on the effect on profit of incorrect treatment
 Calculate and comment on the effect on asset valuation so fin correct
treatment

7.1 Capital expenditure

Definition:
is the cost of acquiring asset and improving or extending non-current asset
benefit will last for more than one accounting period
recorded as non-current assets

Revenue expenditure

Definition:
is the purchase of goods for resale or services to run a business on a daily
basis
benefit last less than one accounting period
recorded as current asset or expenses
7.3 Capital receipts

Definition:

 income obtained from investment and financing activities of the business

 benefit will last for more than one accounting period
 recorded as non-current liabilities or capital

Examples:

 Issuance of shares
 Capital contribution from owner

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 Loan from financial institutions/banks

DANIYAL SIDDIQUI
 Government grants

O/A level Accounting

7.4 Revenue receipts

Definition:

 income obtained through normal business operations

 benefit last within one accounting period
 recorded as income

Examples:
 Sales of goods
 Discount received
 Interest income
 Divid end income

Incorrect What happens? Effect on Profit Effect on asset

treatment for the year valuation

Capital Expenses will be shown Profit for the Non-current assets

Expenditure more. So, the profit for the year will be will be understated
incorrectly year will be incorrect in the understated
treated as Income statement.
Revenue
Expenditure The Non-current asset will
be shown less. So, the Non-
current asset value will be
incorrect in the Statement
of Financial Position.

Revenue Expenses will be shown Profit for the Non-current asset

Expenditure less. So, the Profit for the year will be will be overstated
incorrectly year will be incorrect in the overstated
treated as Income statement.
Capital

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Expenditure The Non-current asset will

DANIYAL SIDDIQUI
be shown more. So, the

O/A level Accounting

Non-current asset value will
be incorrect in the
Statement of Financial
Position.

Incorrect What happens? Effect on Profit Effect on Statement

treatment for the year Financial Position

Capital Receipt Receipts will be shown Profit for the Non-current asset
incorrectly more, so the profit for the year will be will be overstated
treated as year will be incorrect in the overstated or Non-current
Revenue Income statement. liability will be
Receipt understated.
The Non-current asset will
be shown more or Non-
current liability will be
shown less. So, the value of
Non-current assets or the
value of Non-current
liability will be incorrect in
the Statement of Financial
Position.

Revenue Receipts will be shown less, Profit for the Non-current asset
receipts so the profit for the year year will be will be understated
incorrectly will be incorrect in the understated. or Non-current
treated as Income statement. liability will be
Capital receipts overstated.
The Non-current asset will
be shown less or The Non-
current liability will be
shown more. So the Non-
current asset value or Non-
current liability value will
be incorrect in the
Statement of Financial
Position.

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Past papers

DANIYAL SIDDIQUI
QUESTION1 MAY 2010 P21Q2(f)

O/A level Accounting

During the year ended 30 April 2010, Sparky Ltd carried out work on the buildings.

1. Built an extension
2. Redecorated the interior
3. Installed air conditioning

REQUIRED
State whether each item, 1 to 3 above, is capital expenditure or revenue expenditure.
*3+
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QUESTION
QUESTION2 NOVEMBER 2010 P22Q3 (g & h)
(g) theExplain
(g) Explain the term
term capital capital expenditure.
expenditure. *2+
*2+
(h) In the
(h)tableInbelow, place
the table a tickplace
below, (√) under
a tickthe
(√) correct heading
under the to heading
correct indicate to
which of the
indicate
following is capital expenditure or revenue expenditure.
which of the following is capital expenditure or revenue expenditure.

Capital expenditure Revenue expenditure

Advertising campaign
A new computer system
Purchase of computer
CDs
*3+

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QUESTION 3 MAY 2011 P22 Q2 (f)

DANIYAL SIDDIQUI
O/A level Accounting
Identify by ticking the appropriate box, (✓) whether each payment is capital
expenditure or revenue expenditure.

Capital expenditure Revenue expenditure

Purchase of spares form a chancery
Installation of addition al
Machinery
Repairs to office equipment
Purchase of additional loose tools

(f) Explain the difference between capital and revenue expenditure. *4+
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QUESTION4 MAY 2011 P22 Q2 (g)

(g) Indicate by placing a tick (✓) which transactions are capital expenditure and
which are revenue expenditure. *4+
Capital Revenue
Transaction
expenditure Expenditure
(i) Purchase off fixtures and fittings
(ii) Installing and testing an air
conditioning system
(iii) Insurance of shop premises
*3
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QUESTION5 MAY2013P22Q1 (f)

DANIYAL SIDDIQUI
(f) Indicate by placing a tick (✓) which transactions are capital receipt sand which

O/A level Accounting

are
revenue receipts.
Transaction Capital receipt Revenue receipt
Cash sales
Loan from a bank
Discount received
Commission received
Sale of a motor vehicle

*5+
QUESTION6 NOVEMBER 2014P21Q2 (f)

Swift Limited are considering the following expenditure on delivery vehicle2.

2.1. AReplacement
new trailer tyres
3. An annual maintenance service.

REQUIRED
State whether each of the items 1,2 and 3 above is capital expenditure or revenue
expenditure. [3]
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QUESTION7 NOVEMBER 2014 P22Q2 (e & f)

A jib commenced business on 1October 2014 delivering parcels to customers’ homes.
A jib is considering:

Charging the total purchase price of the motor van to the

Proposal 1
2015 income statement.
Using the diminishing (reducing) balance method to charge
Proposal 2 depreciation on the motor van in 2015, and then to change
to the straight line method for 2016 and 2017.
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REQUIRED

DANIYAL SIDDIQUI
(e) Name and explain which accounting concept would not be complied with if

O/A level Accounting

Ajib implemented his proposals. *6+
Ajib also incurred the following expenditure.

1 Delivery of motor van from manufacturer

2 Fuel for motor van
3 Sign writing his business name on the motor van
4 Motor van insurance
(f) State whether each of the items above is capital expenditure or revenue expenditure +4
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QUESTION 8 NOVEMBER 2016 P22Q2 (d & e)
____
(d) Explain each of the following accounting terms

(i) Revenue Expenditure [2]

(ii)Capital receipt [2]

(e) Indicate by placing a tick whether each of the following transactions is

revenue expenditure, revenue receipt, capital expenditure or capital receipt.

Revenue Revenue Capital Capital

Transaction expenditure receipt expenditure Receipt
Sale of motor van
Purchase new motor van tyres
Cash discount received
Purchase a new motor van
[4]
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QUESTION 9 NOVEMBER 2016 P22Q2 (c&d)

DANIYAL SIDDIQUI
O/A level Accounting
(c) Define the term‘ revenue receipt’. [2]

(d) Complete the following table by inserting a (

transaction is revenue expenditure, a revenue receipt, capital expenditure or a
capital receipt.

(e) The first one has been completed as an example.

Transaction Revenue Capital

Expenditure Receipt Expenditure Receipt
Sold office computer
Received interest on deposit
Account
Took out a 5-year bank Loan
Paid property insurance
Bought motor vehicle to deliver
Goods
Received commission

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Clubs and societies

DANIYAL SIDDIQUI
O/A level Accounting
 distinguish between receipts and payments accounts and income and
expenditure accounts

 prepare receipts and payments accounts

 prepare accounts for revenue-generating activities, e.g. refreshments,

subscriptions

 prepare income and expenditure accounts and statements of financial position

 make adjustments to financial statements as detailed in 5.1 (sole traders) define

and calculate the accumulated fund.

The main aim of a business is to earn a profit, whereas the main aim of a non-trading
organization is to provide facilities and services for its members. Most businesses
maintain double entry accounting records, but many non-trading organizations only
maintain a cash book. At the end of the financial year, the treasurer often prepares a
summary of the cash book, known as a Receipts and Payments Account. If there is
some form of regular trading, such as a snack bar, sports shop, etc., a Trading Account
may be prepared. This is very similar to a Trading Account prepared by a business. A

A non-trading organization prepares an Income and Expenditure Account instead of a

Profit and Loss Account. A non- trading organization prepares a Balance Sheet in the
same way as a trading business, but capital is replaced by Accumulated Fund.

Receipts and payments account

This is a summary of the cash book for the financial period. Any money received during
the period is debited and any money paid during the period is credited. The account is
then balanced in the usual way. The balance "is carried down and becomes the opening
balance for the next financial period. This balance may be money in the bank, actual
cash, or a combination of the two. A debit balance represents money owned, and is an
asset, a credit balance represents a bank overdraft, and is a liability. This account
records all money paid and received during the period. Non-monetary items such as
depreciation are not entered in this account, and no adjustments are made for accruals and
prepayments. No distinction is made between capital expenditure and revenue
expenditure, or between capital receipts and revenue receipts.
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Trading account

DANIYAL SIDDIQUI
Some non-trading organizations do carry out a regular trading activity, but this is not

O/A level Accounting

the main purpose of the organization. Many clubs and societies have a café, a shop, a
bar, and so on, where goods are bought and sold. A Trading Account should be
prepared for each trading activity in order to calculate the gross profit or loss earned.
The gross profit of a business is calculated in the Trading Account and then transferred
to the Profit and Loss Account. In a similar way, the gross profit of a trading activity of
a non-trading organization is calculated in the Trading Account and then transferred
to the Income and Expenditure Account.

Income and expenditure account

This is similar to the Profit and Loss Account prepared for a business. It lists all the
expenses of the organization and all the gains. Where the expenses are lower than the
gains, the difference is referred to as a Surplus or Excess of Income over Expenditure.
A business refers to this difference as a net profit. Where the expenses are more than
the gains, the difference is referred to as a Deficit or Excess of Expenditure over
Income. A business refers to this difference as a net loss.

In preparing a Profit and Loss Account for a trading business, the matching concept is
applied and expenses are adjusted for accruals and prepayments. This is also applied
when an Income and Expenditure Account is prepared. Any non-monetary expenses,
such as depreciation, are also taken into account in the Income and Expenditure
Account, in the same way as in a Profit and Loss Account. Capital receipts and capital
expenditure do not appear in a Profit and Loss Account, nor do they appear in an
Income and Expenditure Account.

Receipts and Payments Accounts

 A summary of the Cash Book
 Records all money received and paid
 No distinction between cash and bank transactions
 No distinction between capital / revenue expenditure and capital / revenue
receipts
 No adjustments for prepayments and accruals
 Exclude non-monetary transactions
 Debit account
 Debit balance - Current Asset
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 Credit balance - Current Liability

DANIYAL SIDDIQUI
Income and Expenditure Accounts

O/A level Accounting

Prepared in the same principle as the Income Statement of a sole trader

 Income > Expenditure = Surplus for the year Income < Expenditure = Deficit for
the year

 Fund-raising activity: income and expenses for that activity are set off against
each other to determine profit or loss on that activity

Statements of Financial Position

Prepared in the same principle as the Statement of Financial Position of a sole trader.

 Owner's Equity is replaced with Accumulated Fund

 No Drawings

Statement of Financial Position at “date” (Extract)

$
Accumulated Fund
Opening balance XX
Add: Surplus for the year (OR Less: Deficit for the year) X
XX
Accumulated Fund

Definition:

Capital fund accumulated within the organization from surpluses obtained from
running the club.

Calculation:

Accumulated fund = Assets - Liabilities

Subscription Account (Income)

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DANIYAL SIDDIQUI
Date Detail $ Date Detail $

O/A level Accounting

Subscription in Xyz Subscription in Xyz
Arrears(opening) Prepaid
(opening)
Subscription xyz Bank Xyz
refund (subscription
received)
Bad debts Xyz
Subscription in Xyz Subscription in Xyz
Prepaid (closing) Arrears(closing)
XYZ XYZ

NOTE: To remember this concept easily remember the key word (APPA)

Income and Expenditure a/c

Income
Profit on sale of XYZ
refreshment
Gain on disposal XYZ
Sale of tickets XYZ
Subscription XYZ
income(W)
Rent of hall/premises XYZ
Donation(if specified XYZ
as revenue receipt)
XYZ
Less: Expenditure
Wages- Grounds man (XYZ)
and assistant
Loss on disposal (XYZ)
Depreciation of (XYZ)
ground equipment
Interest on loan (XYZ)
Secretary’s expense (XYZ)
Ground upkeep (XYZ)
Utilities (XYZ)
(XYZ)
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Surplus/Deficit of the XYZ /(XYZ)

year

DANIYAL SIDDIQUI
O/A level Accounting
Statement of Financial position

Assets $ $ $
Non-current assets Cost Acc Dep N.B.V
Land XYZ (XYZ) XYZ
Building XYZ (XYZ) XYZ
Equipment XYZ (XYZ) XYZ
Club house XYZ (XYZ) XYZ
Fixtures XYZ (XYZ) XYZ
XYZ
Current Assets
Inventory XYZ
Subscription in XYZ
Arrears/owing
Prepaid Expenses XYZ
Bank XYZ
Cash XYZ XYZ
Total Assets XYZ
Accumulated Fund
Accumulated fund at the XYZ
beginning
Add: Surplus/Less Deficit XYZ/(XYZ)
Add: Donation (Capital) XYZ XYZ
/Legacy/Gift
Non-current Liabilities
Bank Loan XYZ XYZ
Current Liabilities
Prepaid subscription XYZ
Trade payable/Creditor XYZ
Bank OD/ Over draft XYZ
Accrued Expense XYZ XYZ
Total accumulated fund/ XYZ
Liabilities
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Past paper

QUESTION 1 MAY 2009 P2 Q3 (c & d)

DANIYAL SIDDIQUI
O/A level Accounting
The Ranford Sports Club keeps a full set of double entry accounts and prepares
monthly accounts. The summarized receipts and payments account for the month of
April 2009 was as follows.

Receipts and Payments Account

$ $
Balance b/d 1 680 Payments for café 4 320
Purchases
Café takings 9 850 General expenses 1 890
Donations 50 Repairs to café fixtures 165
Subscriptions Balance c/d 5 735
12 110 12 110

1 Other balances 1 April 30 April

$ $
Café inventory 1700 1 230
Trade payables for café 1 830 1 470
Purchases
Café fixtures 5 450 5 400

1 The café takings recorded in the receipts and payments account do not include
the income, $770, for a birthday party held on 20 April 2009.

2 The wages for the café manager have not been paid for the month of April. The
café wages have been calculated as $815.

REQUIRED

(c) Prepare the café trading account for the month ended 30 April 2009.
*9+

(d) State two differences between a receipts and payments account and an
income and expenditure account. *4+
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DANIYAL SIDDIQUI
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O/A level Accounting

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QUESTION 2 NOVEMBER 2011 P21 Q3

The treasurer of the Sandbury Sports Club did not keep full accounting records. The
following information was available at 31 October 2011

Cash Book (summary)

$ $
Balance b/f 1 November 2010 105 Purchase of refreshments 19000
Subscription received: Rent and rates 1200
– for the year ended 31 Oct 2010 150 Operating expenses 3750
– for the year ended 31 Oct 2011 3200 Purchase of equipment 900
– for the year ended 31 Oct 2012 310 Balance c/d 31 October 2011 3915
Sales of refreshments 25 000
28 765 28 765

1 Balances 1 November 2010 ($) 31 October 2011 ($)

Inventory of refreshments 2 200 700
Operating expenses Prepaid 100 Accrued 250
Equipment (net book value) 3 200 2 700
Subscriptions in advance 175 310
Subscriptions in arrears 270 90
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REQUIRED

DANIYAL SIDDIQUI
O/A level Accounting
(a) Calculate the accumulated fund at 1 November 2010. *6+

(b) Prepare the refreshments trading account for the year ended 31 October
2011. *4+

(c) Prepare the income and expenditure account for the year ended 31
October 2011. *10+

(i) State the section of Sandbur Sports Club’s balance sheet on 31

October 2011 in which subscriptions paid in advance will appear. Give a
reason for your answer *2+
(ii) State the section of Sandbur Sports Club’s balance sheet on 31
October 2011 in which purchase of equipment will appear. Give a reason
for your answer. *2+
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QUESTION 3 MAY 2012 P21 Q3

DANIYAL SIDDIQUI
O/A level Accounting
The following balances were extracted from the books of Trinity Social Club on 30 April
2012:

$
Fixtures and fittings 1 600
Donations income for the year 150
Subscriptions 1980
Rent 1400
Sales of refreshments 2500
General expenses 780
Purchases of refreshments 1150
Bank overdraft 100

REQUIRED

(a) Complete the following trial balance at 30 April 2012 clearly showing the
value of the accumulated fund. *5+

Trinity Social Club

Trial Balance at 30 April 2012

Debit Credit
$ $
Fixtures and fittings
Donations income
Subscriptions
Rent
Sales of refreshments
General expenses
Purchases of refreshments
Bank overdraft
Accumulated fund