Accounting Treatment of Certain Items in Financial Accounting

FINANCIAL ACCOUNTING

Contents
Question 1:.......................................................................................................................................3
Question 2:.......................................................................................................................................5
Question 3:.......................................................................................................................................7
Question 4:.......................................................................................................................................8
Bibliography....................................................................................................................................9

Question 1:
Being an accountant of Himalaya Ltd that has a cafe and gift shop at Mount Tamborine in the
Gold Coast hinterland, let us discuss accounting treatment of certain items:
(a) It has been observed that $20,000 cash was stolen from the safe at night. Such theft of cash is
a company's loss and cannot be found back. It is therefore considered as an expense. SAC 4
'Statement of Accounting Concepts' defines expense as “consumptions or losses of future
economic benefits" that reduces the assets balance or increases the liability of an organization.
Such an expense is to be recognized in the revenue statement for the reporting period if it is
probable that such expense has actually occurred and also, such a consumption or loss can be
reliably measured (Atkinson, 2012).
So, in the following case, a theft expense account would be created and debited as an expense of
value $20,000 in the income statement. On the other hand, it will be shown as a reduction in the
asset balance, that is, would be shown as a reduction from cash-in-hand.
(b) The company has been ordered by Court to repair the environmental damage caused by it to
the local river system (Berry, 2009). However, the costs to be incurred are unknown. The
accounting treatment in such a case could be related with AASB 137 'Provisions, Contingent
Liabilities and Contingent Assets'. A provision is recognized only when:
 an entity possess such legal or constructive obligation occurring due to some past
events ;
 An outflow of resources is probable and reliable estimates can be made of the obligation.
In such a case, where it is probable that the company has to get the damage repaired as it has
been ordered to it on legal grounds, reliable estimates are to be made for recognition of provision
for environmental damage. Such a provision would be recognized on the balance sheet on the
liability side and would be expensed in the income statement. This is simply done to set aside an
expected amount from the profits so as to cover the liability in future.
(c) The company received $10,000 as donation. Usually, for the accounting of donation, the
purpose of such donations are determined first, that is whether donations have a general purpose