Accounting Theories

Question 1

Accounting Entity

Answer 1

The activities of a business are separate from the actions of the owner. All transactions are recorded from the point of view of the business.

Question 2

Accounting
Period

Answer 2

The life of a business is divided into regular time intervals e.g. monthly, quarterly,yearly.

Question 3

Accrual basis of
Accounting

Answer 3

Business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period

Question 4

Consistency

Answer 4

Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison.

Question 5

Going Concern

Answer 5

A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down.

Question 6

Historical Cost

Answer 6

Transactions should be recorded at their original cost.

Question 7

Matching

Answer 7

Expenses incurred must be matched against income earned in the same period to determine the profit for the period.

Question 8

Materiality Concept

Answer 8

Relevant information should be reported in the financial statements if it is likely to make a difference to the decision-making process.

Question 9

Monetary

Answer 9

Only business transactions that can be measured in monetary terms are recorded.

Question 10

Objectivity Concept

Answer 10

Accounting information recorded must be supported by reliable and verifiable evidence (source documents) so that financial statements will be free from opinions and biases.

Question 11

Prudence theory

Answer 11

The accounting treatment chosen should be one that least overstates assets and profits and least understates liabilities and losses.

Question 12

Revenue
Recognition theory

Answer 12

Revenue is earned when goods have been delivered or services have been provided.