POA Summary Notes - O Levels

1 POA Summary Notes 1. Accounting Theories 2. Definitions 3. Double entry/ Journals 4. Formulas 5. Financial Statements 6. POA theory questions

2 1. Accounting Theories • state the general explanation of each accounting theory • explain how each accounting theory is applied in specific scenarios Accounting theory General explanation Specific application Objectivity Accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases. A source document provides evidence (objectivity theory) to capture occurrence of a transaction. The transaction is recorded at the original cost that it occurred (historical cost theory). Historical cost Transactions should be recorded at their original cost. Monetary Only business transactions that can be measured in monetary terms are recorded. Accounting entity The activities of a business are separate from the actions of the owner. All transactions are recorded from the point of view of the business. Explain how the accounting entity theory is applied to account for capital and drawings. According to the accounting entity theory, only transactions that affect the business are recorded while transactions relating to the owner that do not affect the business are not recorded. Accounting period The life of a business is divided into regular time intervals. As businesses are assumed to operate forever (going concern theory), financial statements should be prepared at regular time intervals (accounting period theory) to provide timely information for stakeholders to make decisions. Going concern A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down.

3 Accounting theory General explanation Specific application Revenue Recognition Revenue is earned when goods have been delivered or services have been provided. Explain the revenue recognition theory behind the accounting of revenue and other income. According to the revenue recognition theory, • revenue is recognised when goods are sold and delivered. • service fee revenue is recognised when services have been provided. Accrual basis of accounting Business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period. Explain the accrual basis of accounting behind the accounting of revenue and other income. Based on the accrual basis of accounting, • service fee revenue received before services are provided should not be recognised until the services are provided to the customer regardless of whether payment has been received or not. • other income that relate to services that have been provided but not received must be recorded as other income in the current financial period. Explain the accrual basis of accounting behind t