1. Accounting Theory

Question 1

Explain accounting entity/business entity concept?

Answer 1

Business is treated as a separate entity from its owner.

implication:
1. only business transactions are recorded in business books.
2. contribution of assets into business by owner will be recorded as “Capital”
3. withdrawal of assets by owner for personal use will be recorded as “drawings”

Question 2

Explain Going Concern

Answer 2

Business entity is assumed to operate indefinitely.

Question 3

Explain Accounting period

Answer 3

The life of the business divided into specific periods of time for the purpose of preparing financial reports.

implication
1. Trial balance and financial statement

Question 4

Explain Historical Cost

Answer 4

All transaction should be recorded at its original cost

Question 5

Explain Monetary theory

Answer 5

Only transactions which can be expressed in monetary terms are to be recorded.

Question 6

Explain Objectivity theory

Answer 6

There must always be objective verifiable evidence for reporting any accounting information. Financial statement should be free of personal bias and be based on facts rather than opinion.

Implication:
Hence business transactions based on source document.

Question 7

Explain Matching theory

Answer 7

Expenses incurred must be matched against revenue earned in the same period to derived a true and fair profit for the year.

Implication

1. business charges depreciation of non-current assets end of the financial year.
2. business estimates amount of debts uncollectible end of the financial year.

Question 8

Explain Prudence theory

Answer 8

Accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities ae losses.

Implication:

1. Inventory is valued at lower of cost and net realisable value.
2. Business provides estimation of debts uncollectible end of the financial year.
3. business charges depreciation of non-current assets end of the financial year.

Question 9

Explain Accrual basis of accounting

Answer 9

Revenue is recognized when is it earned and expenses is recorded when it is incurred in the relevant accounting period regardless of whether cash is received for revenue or paid for expenses.

Implication:
business make adjustment for revenue earned and expenses incurred to be recorded in the financial statements.

Question 10

Explain Materiality concept

Answer 10

An item is considered material if it is likely to make a difference to the decision making process.

Criterion used in classifying a capital expenditure or revenue expenditure of an item.

Question 11

Explain consistency theory

Answer 11

Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison.

Implication:
method to calculate depreciation for non-current asset should not change from year to year.

Question 12

Revenue recognition theory

Answer 12

Revenue is earned when goods have been delivered or services have been provided.