Accounting conventions Flashcards
What are some of the guiding concepts?
-Objectivity convention
-Money measurement
-Historic cost
What is the objectivity convention?
Financial statements should be free from personal bias, based on evidence, and should be objective and verifiable.
What is the money measurement concept?
Financial statements exclude resources that cannot be measured in monetary terms.
What is the historic cost convention?
Helps avoid subjectivity—what you paid for it, not what you can sell it for
What is the matching concept?
Sales of an accounting period must be matched to the expenses of that same accounting period.
What is the prudence principle?
If you incur an expense this year and are unsure if it will bring future benefits, include it in the income statement.
What is the realisation convention?
Only recognising sales when the activities to generate the revenue are complete.
What is the going concern convention?
Businesses will continue operations for the forseeable future with no need/intention to liquidate.
What is the prudence convention?
An attitude: don’t be optimistic; profits shouldn’t be recorded until realised; record actual losses in full.
What is the consistency convention?
Consistent treatment in accounts for items within each accounting period; treat items the same over time; any change stated and effect quantified.
What is the dual-aspect convention?
For every transaction, there will be two equal accounting entries made, one as a debit and one as a credit.
