the life of a business is divided into specific time periods, usually a year, to
ID: 2363051 • Letter: T
Question
the life of a business is divided into specific time periods, usually a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period. a. this practice is based on the accounting assumption that the life of the business consists of a series of time periods and that it is possible to measure accurately the results of operations for each period. Comment on the validity and necessity of this assumption. b. what has been the effect of this practice on accounting? what is its relation to the accrual system?What influence has it had on accounting entries and methodology?Explanation / Answer
A: If a business is run without any accounting period, the decision makers of the business will have no accurate & in-hand information about the status of the business. The operations of a business organization is an ongoing process and without dividing the business records into a series of periods, the outcome / results of the business conducted by the organization could not be checked. When the period is divided into different accounting periods, the costs of raw materials used for production of finished products, closing balances, units sold and other costs could be allocated accurately.
B: On accounting side, this practice has following affects:-
i. all expense & income accounts are closed at the ending date of the period.
ii. Stock taking of raw materials and finished products
iii. Determination of depreciation on plant and machinery
iv. Determination of insurance & other expenses utilitized
v. Preparation of Income Statement & Balance Sheet
vi. Determination of assets & liabilities i.e owners' equity
What is its relation to accrual system
All accounts relating to receivable & sales will be closed at the ending day of the accounting period for preparation of balance sheet.
What influence has it had on accounting entries and methodology?
It has no influence on accounting entries & methodology except closing entries at the end of accounting period and preparation of all financial statements for this period.
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