Question

You are required to identify and briefly explain the relevant accounting concepts to adopt in each of the following problems:

1. A customer with a poor credit record might go bankrupt owing the company Sh. 500,000.

2. A demand by the company’s chairman to include every detailed transaction in the presentation of the annual accounts.

3. A sole-trader business which has paid the proprietors’ income of Sh. 150,000 tax based on the business profits for the year.
4. One of the main branches of the company was gutted down by fire during the current accounting period.

5. At the end of period 1, it is difficult to be ascertain whether the company will have to pay legal fees of Sh. 1,000,000 or Sh. 3,000,000.

(Note: in each case, give a brief explanation of required accounting treatment).                                         [10 marks

Answer 1

SI No	Concept	Remarks and Accounting treatment
i	Prudence concept	Prudence principle states that provide or all losses and expenses but do not anticipate gains.
		Bad debts provision needs to be recorded for debtors.
	OR	OR
	Going Concern	Accounts are prepared in the assumption that company will continue to operate in the near
		future. If the amount is very high for the firm, it may affect the going concern of the company
		and hence it needs to be disclosed in the notes to financial statements.
ii	Full Disclosure/	It is the responsibility of the management to ensure that all transactions are accounted for
	Completeness	and presented accurately and fully as required for the shareholders.
iii	Matching Concept	Matching concept says that all expenses must be charged to profit statement in the period in
		which the revenue, to which those expenses relate, is earned.
		Here, the tax expense is matched with the net income earned.
iv	Going Concern	Since one of the main branches was gutted down by fire, it would definitely affect the going
		concern of the company and hence needs to be disclosed in the notes to accounts.
v	Reliability	Legal fees can be recorded as contigent liability as a footnote to financial statements.
		But here, the amount cannot be estimated accurately. Hence should not be recorded as it
		affects the reliability of the financials statements.