This essay stresses that economic entity concept states that the recorded activity of the business must be kept separate from that of the owner and any other business. Mr. Mansoor has not followed this principle to the latter since he has used the business money as a holiday trip for his wife…
As the discussion outlines, the accrual concept states that revenue is recognized when it is earned and realized or realizable while expenses are recognized in the period in which the related revenue is earned. In the case of Mr. Mansoor, the insurance premium expenses can only be realized when revenue is earned and therefore the prepaid premium of 200 is subtracted from 800 to obtain premium expense of 600. Also the interest expense for the cash borrowed from Mustafa is an example of accrued expense.
The principle states that a company should report an expense on the income statement in the same period that the related revenue is earned. For instance, the depreciation expenses for the non-current assets such as plumbing equipment and van are only recognized to the current year i.e. at the end of 2013 when they might have earned revenue. The prudence concept states that the transactions that the company is uncertain about should not be overstated or understated. Mr. Mansoor has exercised the prudence concept since he has created allowance for the doubtful debts that should be written off i.e. 10% of the accounts receivable. Since the company was able to record a net profit of $12,926, this shows that its currents expenses are less than its revenues/income. Therefore, the company is able to meet its short-term financial needs. Additionally, the income statement shows that the company is liquid and can be able to meet its daily/short-term needs. The balance sheet reflects a snapshot of the performance of the company on a single date; it’s usually on the last date of the financial year. Judging from the income statement, the company’s financial performance as at 31st Dec 2013, the company’s current ratio i.e. current assets/current liabilities, 10,887/1,773=6.14 shows that the company is able to pay the bills. ...
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