accounting assumption and qualititative characteristics

Question 1

explain accounting entity assumption

Answer 1

the assumption that the records of assets, liabilities and business activities of the entity are kept seperate from the owner’s entity.
e.g. James used his own cash to purchase inventory for the business

Question 2

explain going concern assumption

Answer 2

the assumption that the business will continue to operate into the future, and its records are kept on that basis. it is important because it allows us to record transactions that affect the future of the business
e.g. if sales are made on credit cash will not be received until a later date.

Question 3

explain period assumption

Answer 3

reports are prepared for a particular period of time, month or year, to obtain comparability of results. reporting period cannot be longer than a year to meet tax requirements

Question 4

explain accrual basis assumption

Answer 4

the elements of the reports are recognised when they satisfy the definitions and recognition criteria, meaning profit is calculated as revenue earned in a particular period less expense incurred in that same period
e.g netflix subscription

Question 5

explain relevance

Answer 5

financial information must be capable of making a difference to the decisions made by users by helping them form predictions and or confirm or change their previous evaluations

Question 6

explain faithful representation

Answer 6

the information is a faithful representation of the real world economic event it claims to represent. free from error and neutral

Question 7

explain comparability

Answer 7

useful information is provided when the financial reports of a business can be compared over time and compared with similar information of other business’

Question 8

explain verifiability

Answer 8

ensures that different, knowledgeable and independent observers can reach the same conclusion that a representation of an event is faithfully represented

Question 9

explain timeliness

Answer 9

financial information should be available to decision makers in time to be capable of influencing their decisions

Question 10

explain understandability

Answer 10

financial information are presented without accounting jargon, presented clearly and concisely