Accounting Rules

Question 1

The business entity principle

Answer 1

The business is treated as being completely separate from the owner of the business

Question 2

The consistency principle

Answer 2

The accounting methods must be used consistently from one accounting period to the next

Question 3

The principle of duality

Answer 3

Every transaction is recorded twice - once on the debit side and once on the credit side

Question 4

The going concern principle

Answer 4

That the accounting records are maintained on the basis that the business will continue to operate for indefinite period of time

Question 5

The historic cost principle

Answer 5

All assets and expenses are initially recorded at their actual cost

Question 6

The matching principle

Answer 6

The revenue of the accounting period is matched against the costs of the same period

Question 7

The materiality principle

Answer 7

Individual items which will not significantly affect either the profit or the assets of a business do not need to be recorded separately.

Question 8

The money measurement principle

Answer 8

Only information which can be expressed in terms of money can be recorded in the accounting records

Question 9

The prudence principle

Answer 9

Profits and assets should not be overstated and losses and liabilities should not be understated

Question 10

The realization principle

Answer 10

Revenue is only regarded as being earned when the legal title to goods passes from the seller to the buyer therefore profit should not be recorded until it has actually been earned

Question 11

Comparability

Answer 11

The information contained in financial statements can be useful if it can be compared with;
Same business but a different accounting period
Other similar business with similar information

Question 12

Relevance

Answer 12

Financial statements should be relevant to the user of financial statements

Question 13

Reliability

Answer 13

Information provided in financial statements should be reliable;
True representation of transitions and events
Independently verified
Free from bias
Free from significant errors
Prepared with suitable caution

Question 14

Understandability

Answer 14

Financial statements should be understandable to the users of those statements

Question 15

Capital expenditure

Answer 15

Money spent on purchasing, improving or extending non-current assets

Question 16

Revenue expenditure

Answer 16

Money spent on running a business on a day-to-day bassis

Question 17

Capital receipt

Answer 17

Money received by a business from a source other than normal trading activities

Question 18

Revenue receipt

Answer 18

Money received by a business from normal business from normal trading activities

Question 19

State the basis on which inventory should be valued

Answer 19

inventory is always valued at the lower of cost or net realizable value. This is due to the principle of prudence as overvaluing the inventory would overvalue both profit and assets.

Question 20

Cost of inventory

Answer 20

Is the actual purchase price plus any additional costs (such as carriage inwards) incurred in bringing the inventory to its present position and condition

Question 21

The net realizable value

Answer 21

is the estimated receipts from the sale of the inventory, less any costs of completing the goods or costs of selling the goods.