Question

Part A The owner of Max-Mix allocates the entire cost of a new delivery vehide, which had a cost of $30,000 to motor vehicle expenses in the year the delivery vehicle was bought. With reference to accounting ncepts, discuss whether you agree with this accounting treatment. + + Part B Explain the difference between Cash accounting and Accrual accounting. You also need to explain, based on the Conceptual Framework, which is the correct way to record transactions (cash or accrual accounting) and why this is the case.

Answer 1

The matching concept under accounting states that the cost should be recorded when the corresponding revenue is earned. If we record the complete cost of asset at once as expense but actually the asset is to be used for multiple years, it is against the matching concept. In order to follow the same, the cost of delivery vehicle will be recorded as fixed asset and its cost will be distributed over its useful life in form of depreciation. I don't agree with the accounting treatment by the owner. The correct treatment would be to record $30,000 vehicle under fixed asset. The cash basis record revenues and expenses when the cash is received, or cash is paid as revenue and expense respectively. Under accrual basis revenue or expense are recorded as and when they are incurred or earned. When goods are sold, or services are provided the revenue would be recorded irrespective of when cash is received. In this case accrual basis is correct way of transaction because even though cash is paid completely but the cost would be allocated as and when it will incur, that is when vehicle would be used.