acc principles

The business entity concept postulates that the transactions that are related to the business must be recorded separately from those of other businesses or owners (Gothorpe, 2005). In other words, for accounting purposes, the business enterprise and the owners should be treated as independent entities. For a sole proprietorship business, the business and the partners are two entities. As a result, when the sole trader withdraws $1000 from the business, it leads to a $1000 reduction of equity and amount taxable to the sole shareholder. For a company and its shareholders, the two are separate entities and for partnership business, the partners and the business are separate entities as well.

ii). Prudence . It is a concept that combines a conservative-based approach of retroactively estimating assets, profits, and revenues as well as a proactively estimating expenses, losses, and liabilities (Gothorpe, 2005). This concept helps ensure that assets are not overestimated while liabilities are not underestimated. It improves confidence that all stakeholders have in the business. An example of application of prudence concept is the inventory valuation. The internal Accounting Standards dictates that we value inventory at cost or at the net realizable value, whichever is low. If the inventory cost till date is $12000 and its selling price is $25000 after incurring selling expense of $2500, then we should report whichever is lower; net realizable value and inventory at cost. The inventory at cost is $12000, while net realizable value is $22500 (25000-2500). Therefore, the inventory is valued at $12000, which is the lower of the two.

References

Gothorpe, C . 2005. Business Accounting & Finance for Non-Specialists, 2nd edn, Thomson Learning, London,U.K

Question 2

Write down the main features of a company and also define the advantages and disadvantages of running a business as a company?

A company is a legal entity which is formed by a group of persons to engage, operate or carry out business for profit. Its characteristics encompasses;