accounting theories Flashcards
accounting entity theory
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
accounting period theory
the life of a business is divided into regular time intervals
accrual basis of accounting
business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period.
consistency theory
once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison.
going concern theory
a business is assumed to have indefinite economic life unless there is credible evidence that it may close down.
historical cost theory
transactions should be recorded at its original cost,
matching theory
expenses incurred must be matched against income earned in the same period to determine the profit for that period
materiality theory
a transaction is considered to be material if it makes a difference to the decision-making-process
monetary theory
only business transactions that can be measured in monetary terms are recorded
objectivity theory
accounting information recorded must be supported by reliable and verifiable evidence so that financial statements can be free from opinions and biases
prudence theory
the accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities and losses
revenue recognition
revenue is earned when goods have been delivered or services have been provided
