i) Does every businessman need accounting knowledge? (ii) Identify some of the accounting concepts in this case study. (iii) How should

Question

Magesh started a new trading business. He buys and sells packing materials. He wants to be honest in doing his business. He has plans to establish his business in the future. He has little accounting knowledge but has excellent business skills. At the end of his first year of trading, he wanted to value his closing stock. He finds some of the goods are damaged. If he wants to sell them, then he has to  spend some amount for making them in a saleable condition. He also takes some money from his business bank account for his personal use. But, he forgot to record that. 

Now, discuss on the following points:

(i) Does every businessman need accounting knowledge?

(ii) Identify some of the accounting concepts in this case study.

(iii) How should his closing stock be valued?

(iv) Is it possible for him to compare his business results with that of his competitors?

Answer 1

(i) No, Every businessman does not need accounting knowledge. The businessman is called sole trader. If he has little accounting knowledge, is enough, but he should have business skill.

(ii) 1. Money measurement concept. 

2. Going concern concept. 

3. Matching concept. 

4. Realisation concept 

5. Accrual concept

(iii) Convention of conservation or prudence concept. The closing stock will be valued at market price or cost price whichever is lower.

(iv) Yes, it is possible for him to compare his business results with that of his competitors, but the method is not accurate. It may be approximated i.e., capital comparison method followed.