Question 1: Part AThe accrual principles require that expenses should be realized as soon as they are met. Since, the telephone expenses expense belongs to the previous year it needs to be accounted then otherwise it will overestimate the profits of the previous year and go against the basic principles of accounting. Accrual basis of accounting is a method of accounting which states that revenues need to be recorded when they are earned irrespective whether they are received or not and expenses need to be recorded in the year they are made irrespective of the flow of cash.
(Ward, 2011) The other method of accounting is cash basis accounting where revenue and expenses are realized on the basis of flow of cash. (Ward, 2011)Personal withdrawal needs to be treated as a deduction from equity and not expenses as it is not a business expenses. Withdrawing money results in deduction in the contributed equity by the proprietor which thereby needs it to be treated in changes in equity. Owner’s equity is the equity contributed by the owner of the business. It is the money the proprietor lends to the business to start operations. Owner’s equity changes due to change in profits.
An increase in profits increases owner’s equity and vice versaCurrent assets or liabilities means assets which will be converted into cash within a period of one year and is short term. (Little, 2011) Non-current are held for a period longer than one yearPart BThe manufacturing overhead were allocated to the different product on the basis of direct labour hours as it is difficult to differentiate the cost attributable to the different product.
Having a standard like labour hours helps to determine the product cost and helps to keep uniformity in the process. Inventoriable costs are the costs which are cost of assets which are not sold and include the inventories in hand. (Cost, 2011) It is very much similar to the product cost but product cost includes direct labour, direct material and manufacturing overhead whereas inventories are the raw materials. (Cost, 2011) Period costs are the non manufacturing costs which are not directly attributed to a product. (Cost, 2011)Inventories which are recorded in the Balance Sheet are raw materials, work in progress and finished goods.
This includes all materials which need to be processed or are processed but not sold. Selling expense and sales commission are not recorded in the goods manufactured expenses because these expenses are not directly attributable to a product. They are the indirect cost associated with the product and the cost cannot be directly ascertained to any product. Selling expense and sales commission appears on the income statement as is treated as an expense as it is made out of the pocket. Manufacturing overheads are the expenses attributed to a product are directly attributed to a product.
It is also an indirect expense as it doesn’t get reflected in the final product but needs to be incurred to manufacture the product and hence are allocated to the product.