Paper Example on Recognising Non-Current Asset: Double Entry Rule

Published: 2023-07-29
Paper Example on Recognising Non-Current Asset: Double Entry Rule
Type of paper:  Essay
Categories:  Accounting
Pages: 4
Wordcount: 911 words
8 min read
143 views

The double entry rule means that every transaction has a contra entry. The concept holds that every financial undertaking has an impact on more than one item (Schroeder et al., 2019). This law applies to the dualism concept of accounting transactions. Practical application of the rule debits the asset accounts in case of asset addition and crediting the respective paying account. The opposite is applicable when incurring debts and other liabilities.

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Recognition of Non-Current Asset at Cost

Most professionals adhere to the cost principle of accounting, and by this code, they register asset valuation at the original cost of purchase (Jeter & Chaney, 2019). The historical cost principle of accounting is applicable in this situation. The concept concerning such an adjustment implies that accountants will not gradually discharge the cost of the asset over its useful life.

Depreciation

Depreciation is an accounting phenomenon that considers the utility value of an asset. Through depreciation, an asset's useful life gets to be accounted for by the accountants. The matching principle of accounting is practicable here as depreciation is pitched against profits. Accountants dispense a portion of an item's acquisition cost against the company's revenue for that accounting period, and this adjustment reduces the total income of the organization (Weetman, 2019). Also, Accountants debit the asset's depreciation account as per the duality principle of accounting and treat cumulative or accumulated depreciation as the contra entry.

Writing Off of Irrecoverable Assets

Weetman (2019) explains that accountants deem an asset to be irrecoverable when all reasonable measures to get the debtor to pay the company have failed. The prudence and matching principles of accounting dictates recognition of such costs in the financial years the company decides to forego the assets. Christensen et al. (2019) state that the accounting period is an essential concept as all expenses and earnings should be analyzed and evaluated to specific timelines.

Creation of Receivables Allowance

An allowance for receivable is the monetary value owed to the company that the company foresees hardship to collect (Jeter & Chaney, 2019). This practice involves the money that the company presumes its debtors will not be able to pay before the closure of that accounting period. Prudence still applies to this accounting adjustment. Applying the same entails recording the allowance for receivables following the double-entry rule. This practice is a contra asset adjustment between the accounts for doubtful debts reduction and the balance on the accounts receivable.

Provision of Accruals

Accruals are services and goods already utilized by the company, but the firm is yet to pay for the same (Weetman, 2019). The provision of accruals of business expenditures is an accounting concept adhering to the conservatism (prudence) principle of accounting. This concept applies best to the prudence principle of accounting. Immediately the expenses are accrued by the business the accountants record the transaction but revenues recorded when the company realizes sales.

Recognition of Prepayments

A prepaid expense implies business expenses that the company pays for in advance (Weetman, 2019). Accountants treat this expense as an asset to the company, and the ideal accounting treatment for the same relates to the matching principle of accounting, realization, and conservatism. Regarding applicability, the prepaid expenses are assets to the organization until the organization utilizes them.

Inventory Valuation

Valuation of inventory entails computation of all company's stock at the end of an accounting period. Also, inventory valuation expresses the cost of doing business at a particular point in the accounting period (Schroeder et al., 2019). The historical cost principle applies to this adjustment. The assets of the company are recorded at original costs and monetary valuation extended to other factors such as stock holding costs.

Sales Revenue Recognition

Christensen et al. (2019) inform that sales revenue recognition follows the realization principle accounting. Revenue recognition occurs when a sale agreement is acceptable to both parties, and the exchange of goods and services is complete, irrespective of monetary remuneration at the time. Its practicality dictates that accountants record sales or profits whenever business transactions occur.

Withdrawal

Withdrawals are monies occasionally removed from the business by business owners (Thomson and Camp, 2018). As withdrawals are cash outflows, the withdrawer's withdrawal account is debited as accountants credit the respective asset account. The materiality principle guides this aspect of the transaction to separate personal use and business-related expenditure. Objectivity principle guides the application of this accounting adjustment by distinguishing private spending or bias away from business functions and activities.

Summary and Conclusion

Accounting principles, concepts, and assumptions have a seamless transition as they interrelate to form a collective stable accounting profession. The accounting practices detailed herein safeguard investors, the government, and the general public from exploitation by unscrupulous managers and accountants through the presentation of misleading financial statements. As such, everyone should be vigilant and conversant with accounting principles and their application in the world of business. This awareness will ensure more transparency and accountability of the accounting profession.

References

Christensen, T. E., Pei, H., Pierce, S. R., and Tan, L. (2019). Non-GAAP reporting following debt covenant violations. Review of Accounting Studies, 24(2), 629-664. https://doi.org/10.1007/s11142-019-09492-

Jeter, D. C., and Chaney, P. K. (2019). Advanced accounting. John Wiley & Sons.

Schroeder, R. G., Clark, M. W., and Cathey, J. M. (2019). Financial accounting theory and analysis: text and cases. John Wiley & Sons.

Thomson, A., and Camp, L. (2018). No Small Change: Why Financial Services Needs a New Kind of Marketing. John Wiley & Sons.

Weetman, P. (2019). Financial and management accounting. Pearson UK.

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