Accounting Concepts

Question 1

What is Accounting Entity Concept?

Answer 1

• In accounting, the owner of a business is considered to be seperate and distinct from the business that he owns.
• All accounting transactions are recorded from the viewpoint of the business. As such, the owner’s personal transactions should not be included in the books of the business.

Question 2

What is Monetary Concept?

Answer 2

• Money is used as the measuring unit in recording business transactions.
• All transactions must be expressed using the same currency within financial statements for comparison purposes.
• Some important aspects of a business such as the loyalty of the managers and level of competition faced by the business are not recorded as they are not measurable in terms of money.

Question 3

What is Matching Concept?

Answer 3

• Expenses should be recognised and recorded when those expenses can be matched with the revenue those expenses helped to generate for a given accounting period.
• In Profit Determination, revenue must be matched with costs incurred to earn that revenue

Question 4

What is Objectivity Concept?

Answer 4

• Accounting information should be independent and supported with unbiased evidence, to ensure relevanance and reliability of financial statements.
• Source documents are ised to record financial transactions because they are reliable and verifiable.

Question 5

What is Accrual Concept?

Answer 5

• Income is recognised in the period earned, regardless of whether the cash has been received.
• Income is usually recognised at the point when goods are delivered or the completion of services.

Question 6

What is Consistency Concept?

Answer 6

• Similar accounting procedures should be used for items of similar nature from period to period to facilitate comparison of financial results and decision making and guard against manipulation of accounting reports by simply switching to another accounting method that yields more desired results.
• Company is permitted to change its accounting methods as long as the change reflects a more relevant and faithful representation of an underlying economic performance and is disclosed to users by way of a footnote in the accounts.

Question 7

What is Prudence Concept?

Answer 7

• Provision should be made for all foreseeable losses but profits should not be recognised until their realisation is reasonably certain

Question 8

What is Materiality Concept?

Answer 8

• Transactions that have little effect on the financial statements may be treated in the most expedient manner

Question 9

What is Accounting Period Concept?

Answer 9

• Operating life of a business can be divided into specific time periods to facilitate meaningful reporting and comparison.
• This provides a frame of reference for the analysis of accounting reports.
• Regular reporting ensures that the information provided is timely for decision making by its users