James is a trader who sells washing machines on credit. But, he does n

1.	James is a trader who sells washing machines on credit. But, he does not remember the due date to collect the money from his debtors. Some of his customers do not pay on time. His cash inflow is becoming worse. As a result, he could not pay his telephone bill and rent at the end of the accounting period. Hence, he showed only the amount paid as expense. He has many washing machines unsold at the year end. He is worried about the performance of his business. So, he is planning to appoint a manager to take care of his business. The new manager insists James to apply the accounting principle of prudence and matching and also to allow cash discount. Now, discuss on the following points:(i) In what ways prudence and matching principles can be applied for the business of James?(ii) What will be the impact on income statement and the balance sheet, if the outstanding expenses are not adjusted?(iii) On what basis the unsold washing machines should be valued?
Answer» (i) Prudence principle can be applied for the business here closing stock was valued on cost price or market price whichever is lower under the prudence principle. Matching principle can be applied here for revenue and expense. (ii) Outstanding expenses to be added with the concerned expenditure in the income Statement and the outstanding expenses will be recorded in liabilities side. (iii) The unsold washing machine should be valued at cost price or market price, whichever is lower under prudence principle. Managerial commission can be given to motivate the new manager to retain him in the business of James.

James is a trader who sells washing machines on credit. But, he does not remember the due date to collect the money from his debtors. Some of his customers do not pay on time. His cash inflow is becoming worse. As a result, he could not pay his telephone bill and rent at the end of the accounting period. Hence, he showed only the amount paid as expense. He has many washing machines unsold at the year end. He is worried about the performance of his business. So, he is planning to appoint a manager to take care of his business. The new manager insists James to apply the accounting principle of prudence and matching and also to allow cash discount. Now, discuss on the following points:(i) In what ways prudence and matching principles can be applied for the business of James?(ii) What will be the impact on income statement and the balance sheet, if the outstanding expenses are not adjusted?(iii) On what basis the unsold washing machines should be valued?

Answer»

(i) Prudence principle can be applied for the business here closing stock was valued on cost price or market price whichever is lower under the prudence principle. Matching principle can be applied here for revenue and expense.

(ii) Outstanding expenses to be added with the concerned expenditure in the income Statement and the outstanding expenses will be recorded in liabilities side.

(iii) The unsold washing machine should be valued at cost price or market price, whichever is lower under prudence principle. Managerial commission can be given to motivate the new manager to retain him in the business of James.

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