Accounting conventions

Question 1

Prudence

Answer 1

The prudence concept in accounting means that revenues and profits should only be recorded when they are certain, while expenses and losses should be recorded as soon as they are reasonably possible. This ensures that financial statements do not overstate profits or assets.

Question 2

Going concern

Answer 2

Assumes that a business will continue to operate for the foreseeable future and has no intention or need to liquidate or shut down.

Question 3

Accrual concept

Answer 3

revenues and expenses are recorded when they are earned or incurred, not when cash is received or paid.

Question 4

Consistency

Answer 4

The consistency concept in accounting means that a company should use the same accounting methods and practices across accounting periods. This ensures that financial statements are comparable over time, helping stakeholders analyze the company’s performance effectively.

Question 5

Materiality

Answer 5

only information that is significant enough to influence the decisions of users of financial statements needs to be disclosed. Insignificant details can be omitted to avoid cluttering the financial statements.

Question 6

Matching concept

Answer 6

that expenses should be recorded in the same period as the revenues they help generate, ensuring that profits are accurately measured.

Question 7

Entity concept

Answer 7

The entity concept in accounting states that a business is treated as a separate entity from its owner(s) and other entities. This means the business’s financial transactions are recorded independently of the personal transactions of its owner(s).

Question 8

Money measurement concept

Answer 8

Only transactions that can be expressed in monetary terms are recorded in financial statements. This excludes non-quantifiable items like employee skills or brand reputation.