Accounting Concepts

Question 1

Business entity

Answer 1

The business and its owners are two separate existence entity

Any private and personal incomes and expenses of the owners) should not be treated as the incomes and expenses of the business

Question 2

Money measurement

Answer 2

Money is used in the accounting system to record and report all business transactions. Therefore, you cannot record other aspects of a business such as loyalty of a workforce because it does not have monetary value.

Question 3

prudence

Answer 3

Caution is exercised when making judgements under conditions of uncertainty. Meaning revenues and profits are not anticipated, provision is made for all known expenses and losses and asset values are always understated

Question 4

accruals

Answer 4

Expenses and income for goods and services are matched to the same time period. Meaning revenues are recognized when they are earned and not when cash is received and expenses are recognized as they are incurred, but not when cash is paid

**except if transactions take place with cash

Question 5

historical cost

Answer 5

Assets and liabilities are recorded in the FS at historical cost i.e. the actual amount of the transaction involved. Meaning assets should be shown on the SOFP at the cost of purchase instead of current value

Question 6

going concern

Answer 6

Financial statements are prepared on the basis that the business will continue in operational existence for the foreseeable future

Question 7

Materiality

Answer 7

Some items in accounts have such a low monetary value that it is not worthwhile recording them separately

Question 8

Objectivity

Answer 8

The accounting information should be free from bias and capable of independent verification

Question 9

Realisation

Answer 9

Business transactions are recorded in the FS when the legal title poses between the buyer and seller. Meaning sales are recognized when the goods are sold and delivered to customers or services are rendered

Question 10

Duality

Answer 10

Every financial transaciion is recorded by means of two opposite accounting entries (debit and credit) but of equal values

Question 11

consistency

Answer 11

•Businesses should choose the most suitable accounting methods and treatments, and consistently apply them in every period

e.g. depreciation

Question 12

Give two reasons why these business concepts are relevant

Answer 12

• These concepts help to make the financial statements relevant and reliable to stakeholders
• These concepts enable the FS to be comparable between years and other businesses
• These concepts apply to all businesses i.e. sole trader, partnership and limited companies