Question

_____a. T or F: Creditors of a company are an important group of business stakeholders who are concerned about its financial condition and ability to repay debts. (If false, identify and correct the errors)

_____ b. T or F: Amazon is a very successful business. It recognizes revenues (sales) when the goods ordered by customers have been shipped because this marks the point when the performance obligation has been satisfied. This is an example of the time period concept. (If false, identify and correct the errors.)

_____c. T or F: The going concern concept is applied to prepare financial records separately from and apart from its owners and investors. (If false, identify and correct the errors.)

Why is keeping business books records separate from owners and investors important?

Answer 1

1. True.

Yes, creditors are important group of business stake holders. They will generally sold their goods based on our financial conditions and ability to repay. If our financial condition and short term ability is not in satisfied level, they will reduce the sale or stop the sales.

2. False.

It is realisation concept. Not a periodic concept.

Recognizes revenues (sales) when the goods ordered by customers have been shipped because this marks the point when the performance obligation has been satisfied. This is an example of the realisation concept. This can be made clear by considering the following example:

    A customer at Chicago place an order with a manufacturer at Los angeles on 1^st January. On receipt of order, the manufactures produces goods and delivers them to the customer at Chicago on 1^st February who makes payment of goods on March 1 after enjoying the credit period of one month. In this case, revenue was realised not on January 1, when order was received not on March 1, when cash was realised but on February 1, when goods were delivered to the customer.

3. False.

Going concern concept is not applied to prepare financial records seperately from and apart from its owners and investors.

Going concern concept means, it is assumed a business unit has reasonable expectation of continuing business at a profit for an indefinite period of time. A business unit is deemed to be a going concern and gone concern. It will continue to operate in the future.

keeping business books records separate from owners and investors important:

The business entity concept (also known as separate entity) states that the transactions related to a business must be recorded separately from those of its owners and any other business. In other words, while recording transactions in a business, we take into account only those events that affect that particular business; the events that affect anyone else other than the business entity are not relevant and are therefore not included in the accounting records of the business.

This concept is very important because if transactions of a business are mixed up with that of its owners or other businesses, the accounting information would lose its usability.

The business entity concept of accounting is applicable to all types of business organizations (i.e., sole proprietorship, partnership and corporation) even if a law does not recognize a business and its owner as the separate entities.

Examples 1:

Mr. Mohammad has acquired a floor of a building having 3 halls for $4,500 per month. He uses two halls for his business and one for personal purpose. According to business entity concept, only $3,000 (the rent of two halls) is a valid expense of the business.

Example 2:

The owner of a company lends loan to his company. It would be strictly recorded as company’s liability and that has to be paid back to the owner.