Accounting Principles

Question 1

Going Concern

Answer 1

• Definition: Financial statements assume that the business will continue its operations into the foreseeable future and not be forced to liquidate or close down.
• Example: If a business is facing bankruptcy, this principle might be questioned, and financial reports may include disclosures to that effect.

Question 2

Accural

Answer 2

• Definition: Revenue and expenses are recognized when they are incurred, not necessarily when cash is exchanged.
• Example: If a company provides a service in December but receives payment in January, the revenue is still recorded in December.

Question 3

Consistency

Answer 3

• Definition: Once a company adopts an accounting method, it should continue using that method consistently across reporting periods to ensure comparability of financial information.
• Example: If a company uses straight-line depreciation for assets, it should continue using this method unless a clear reason to change is provided.

Question 4

Prudence

Answer 4

• Definition: When choosing between two solutions, the one that is least likely to overstate assets and revenues should be selected. This avoids over-optimistic reporting.
• Example: If there’s uncertainty about a potential loss, the company should recognize the loss earlier, but gains should only be recognized when realized.

Question 5

No Offsetting

Answer 5

Unless specifically allowed, assets and liabilities / revenue and expense should be reported separately and not netted

Question 6

Materiality

Answer 6

• Definition: Only information that would influence the decisions of users should be included in financial statements.
• Example: Small, insignificant amounts (such as a minor office expense) may not need to be separately disclosed.