QUESTION TWO ACCOUNTING THEORY 12 MARKS

Geraldine runs a business from her home as a sole trader. She sells clothes she makes on-line and has one employee. She has called her business The Clothes Horse.

1. Describe the purpose of an Income Statement.

(1 mark)

2. Explain why Geraldines employee would be interested in the Income Statement.

(1 mark)

3. Geraldine has been told that unlimited liability is a major disadvantage of being a sole trader.

1. Explain what unlimited liability means.

(1 mark)

1. State why the owners of sole trader businesses have unlimited liability.

(1 mark)

The next three questions relate to other accounting concepts that the accountant applies when preparing the financial statements of Geraldines business.

4. The Clothes Horse has bought some new furniture. The accountant will record the purchase of the furniture at the price the business paid for it. Name the accounting concept being applied.

(1 mark)

5. The Clothes Horse will depreciate the furniture using the straight line method. Explain why this method has been chosen by the accountant.

(2 marks)

6. The Clothes Horse got a loan from the bank to buy the vehicle. The loan is classified as a liability in the Statement of Financial Position (Balance Sheet).

Complete the table below to show how the loan meets the definition of a liability.

	The loan must be repaid plus interest.
Obligation to transfer an economic resource
Past event / past transaction

(3 marks)

7. The Clothes Horse has reported accounts payable in its Statement of Financial Position (Balance Sheet) as a current liability. Explain why.

(1 mark)

8. The accountant has applied the period reporting concept when the financial statements for The Clothes Horse were prepared. Balance Day is 30 June each year.

Give an example from the financial statements that shows this.

(1 mark)