3.5 Accounting concepts used in the preparation of accounting records

Question 1

Explain the Money Measurement concept.

Answer 1

Only transactions and events measured in monetary terms are recognized in the financial statements.

Question 2

Explain the Duality concept.

Answer 2

Every financial transaction has two effects (‘debit’ & ‘credit’) which are recorded in two separate accounts.

Question 3

Explain the Cost concept.

Answer 3

Assets and liabilities are recorded at their historical cost. The only exception is when there is a valid reason for revaluing non-current assets.

Question 4

Explain the Going concern concept.

Answer 4

The business to which the financial statements relate will continue to operate in the foreseeable future.

Question 5

Explain the Accruals concept.

Answer 5

Costs and revenue are matched to the time period in which they arose.

Question 6

Explain the Consistency concept.

Answer 6

Use the same accounting treatment for similar transactions. Should not change accounting policies unless there is a valid reason to do so.

Question 7

Explain the Prudence concept.

Answer 7

Do not risk overstating revenue or assets or understating expenses or liabilities. If in doubt, include a figure that will cause profit or the value of assets to be lower rather than higher.

Question 8

Explain the Materiality concept.

Answer 8

Some items are not worth recording separately because their low value means that they do not affect decisions taken by the users of the financial statements.

Question 9

Explain the Realisation concept.

Answer 9

Revenue and purchases are recorded at the date when the goods or services are provided and not when payment is made for them.

Question 10

Explain the Business Entity concept.

Answer 10

The financial statements must only include transactions relating to a specific business and not the people who own or run it.