Accounting Concepts

Question 1

What are accounting concepts?

Answer 1

Basic assumptions which underline the periodic financial accounts of business enterprises.

Question 2

What is the ‘Going Concern’ concept?

Answer 2

The assumption that the business will continue operating into the foreseeable future.

Question 3

What is the ‘Accruals’ concept?

Answer 3

Revenue or expenses that are recorded when a transaction occurs rather than when a payment is received or made.

Question 4

What is the ‘Earned’ concept?

Answer 4

A sale is deemed to have taken place at that point in time at which the goods are delivered or services are provided; and not when the proceeds of sale are received.

Question 5

What is the ‘Incurred’ concept?

Answer 5

Goods and services are deemed to have been purchased on the date they are receive and not when the payment is made.

Question 6

What is the ‘Prudence’ concept?

Answer 6

The assumption that the financial statements have been prepared on a prudent basis. No profits are included that aren’t earned, expenses are complete and not understated. Assets aren’t overstated, liabilities are complete and not overstated.

Question 7

What is the ‘Matching’ concept?

Answer 7

The assumption that in the measurement of profit, costs should be set against the revenue which they generate at the time when this arises.

Question 8

What is the ‘Entity’ concept?

Answer 8

Assumption that the financial statements for an entity represent the transactions of that entity as a unit in it’s own right.

Question 9

What is the ‘Materiality’ concept?

Answer 9

Only items should be disclosed/presented in financial statements. Only apply accounting standards to material items.

Question 10

What is the ‘Time Period’ concept?

Answer 10

Divides the life of an entity into time periods. Users can assume that financial statements represent a period of time, typically one year.

Question 11

What is the ‘Historical Cost’ concept?

Answer 11

Transactions in financial statements that reflect the actual cost incurred or revenue earned. The statement of financial position can be regarded as a history of managements past decision making.

Question 12

What is the ‘Money Measurement’ concept?

Answer 12

The information provided in the financial statements is expressed in monetary amounts, typically the currency of the country where the entity is registered.

Question 13

What is the ‘Duality’ concept?

Answer 13

Double entry. Assumes that every entry/transaction affects two accounts in a set of financial statements in such a manner that it keeps the accounting equation in balance.

Question 14

What is the ‘Substance Over Form’ concept?

Answer 14

The economic substance of a transaction should be given precedence over the legal form of the financial transaction.

Question 15

What is the ‘Measurement’ concept?

Answer 15

Determines amounts at which elements are to be recognised and carried.
(Elements include: assets, labilities, equity, income and expenses).

Question 16

What is the ‘Consistency’ concept?

Answer 16

Allows the user to look at a set of financial statements and assume that the same policies, methods and estimation techniques have been used from year to year. Performance can be monitored over time and with other entities.

Question 17

What is ‘Separate Determination’ concept?

Answer 17

User can assume that assets, liabilities, income and expenses haven’t been netted off against each other; except in same limited instances when the substance of the transaction is that should be netted to.

Question 18

What is the ‘Recognition’ concept?

Answer 18

Items should be recognised in the statement of financial position or the statement of comprehensive income if:

• item meets the definition of an element
• item meets the criteria for recognition.

Question 19

What 3 issues do accounting policies deal with?

Answer 19

1) Recognising
2) Selecting measurement bases
3) Presenting

Question 20

What is the accounting policies application?

Answer 20

• Whether an asset or loss is to be recognised.
• The basis on which it is to be measured.
• Where in the statement of profit and loss or financial position it is to be presented.