Principle of Accounting

Topics: Balance sheet, Generally Accepted Accounting Principles, Asset Pages: 3 (1052 words) Published: January 16, 2013
How do current asset differ from fixed asset? (10 marks)
Current asset is define as cash and other assets that will be converted to cash or consumed during an operating period of one year or less whichever is longer. For current asset in hospitality firm, it is typically consist of cash, marketable securities, account receivable, inventory, and prepaid expenses. They are listed in liquidity order. Receivable, for example, will generate cash earlier then inventory, which have not yet to be used or sold, so are listed below before inventory on the balance sheet. Below are some of the account under current asset and their explanation. (a) Cash: of course is the most liquid of current assets. (b) Marketable Securities: are held as temporary investment and can decline in market price. Any loss in market value at the balance sheet date is recognized as a loss. The value of marketable securities is stated at the lower of cost or market while gains in value are not recognized until the marketable security is sold. (c) Account Receivable: is type of promises from guests to pay the lodging firm in the future for goods and service received. Unfortunately, not all receivables are collected; thus, loses occur under the accrual method, it is desirable, based on the matching principle, to estimate losses on credit transactions in the period of the related credit sales. The amount of uncollectible amounts is usually estimated based on experience. For example, if in the past, 2% of credit sales have been uncollectible, a reasonable estimate is that 2% of the current period’s credit sales will also be uncollectible. An adjusting entry records (debits) the estimated loss as bad debt expense. The credit is to a balance sheet account called allowance for doubtful accounts. The balance sheet reports account receivable at their full amount. Allowance for doubtful accounts is a contra-account and is shown as a reduction of accounts receivable on the balance sheet. When it...
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