Define the concept of going concern. What is the alternative?

The going concern concept is the idea that the entity will continue operating for the foreseeable future – in other words it has sufficient resources to continue trading and its shareholders are happy to keep the company running. If this condition is satisfied, assets and labilities should be determined using the normal accounting rules.

If the business is not likely to keep trading, assets and liabilities should be determined using their net realisable value (i.e. how much they would fetch if sold).

Companies that are on the brink of bankruptcy are not considered on a going concern basis, but this is not the only case. Shareholders can decide to liquidate their company (that requires a qualified majority of the votes).

     Make two examples of non-current assets and two of current assets

Have your pick, plenty of choice. For instance: land and machinery (non-current), inventory and trade receivables (current).

     List and explain the four enhancing characteristics of the IASB conceptual

framework.

Comparability: consistency of reporting (use the same method for the same item across time and entity).

Verifiability: different users would agree that the information is faithfully represented. Auditors can check it.

Timeliness: information is provided in time to be used.

Understandability: information is presented clearly and concisely

     Ricardo's balance sheet shows totals for assets of £83,000 and £36,500 for liabilities.

Use the accounting equation to find the total for Ricardo's capital.

Use the accounting equations: assets (83,000) – liabilities (36,500) = capital (46,500)

     Belinda's business has fixed assets of £12,000, current assets of £8,500 and total

liabilities of £17,300. What is Belinda's capital?

Use the accounting equations: assets (12.000+8.500) – liabilities (17.300) = capital (3.200)

     Exercise 1:

Sophie's balance sheet at 30th September shows the following items:

What are the total assets of the business? The total liabilities? And equity? Use the accounting equation to check if this balance sheet is correct.

Assets = 42.000            Liabilities = 6.000         Equity = 36.000

     Exercise 2

The following is a list of the assets and liabilities of a firm at a particular date.     Identify if each entry is an asset or a liability and use the accounting equation to calculate the firm’s equity

Assets = 28.600            Labilities =  7.000         Equity = 21.600

     For each of the following transactions state whether they are cash or credit transactions:

     Exercise 3

Use the accounting equation to show the effect on the balance sheet of the following set of transactions, keeping track of the total assets and liabilities:

o Start a business by purchasing £10.000 worth of shares     Cash +10.000, Equity +10.000 so  A (+10.000) – L (0) = E (+10.000)

o Borrow £10.000 from the bank

Cash +10.000, Loan +10.000 so  A (+10.000) – L (+10.000) = E(0)

o Buy inventory for £3.000, pay cash

Cash -3.000, Inventories +3000 so A(+3000,-3000) – L(0)=E(0)

o Buy machinery for £12.000 on credit from XXX ltd

Machinery +12.000, debt to XXX +12.000 so  A (+12.000) – L (+12.000) = E(0) o Buy inventory for £2.000 on credit

Inventory +2.000, trade payables +2.000 so  A (+2.000) – L (+2.000) = E(0) o Settle the debt towards XXX ltd

Cash -12.000, debt to XXX -12.000 so  A (-12.000) – L (-12.000) = E(0) o Sell all the goods in the inventory for £10.000

Cash +10.000, inventory – 5.000 so A(+10000,-5000) – L(0)=E(+5000)