accounting theories Flashcards
monetary theory
only business activities that can be recorded in monetary terms are recorded in business’ books
objectivity theory
accounting information recorded must be supported by reliable and verifiable evidence to ensure that FS is free from opinions and biases
historical cost
transactions are required to be recorded at its original cost
going concern
a business is assumed to have indefinite economic life unless there is credible evidence that it will close down
accounting period
life of business is divided into regular time intervals
materiality theory
a transaction is considered material if it makes a difference to the decision-making process
accounting entity
- transactions that affects the business is recorded while transactions relating to owner is not recorded
- activities of business are separate from the actions of owner and all transactions are recorded from the POV of business
accrual basis of accounting
business activities that have taken place regardless whether paid or not yet paid should still be recorded in its relevant accounting period
revenue recognition
income is only earned if goods are delievered or services have been provided
prudence
accounting treatment should at least overstate assets and profits and least understate losses and liabilities
matching
income earned should be matched against expenses incurred to determine profit for the period
income earned or not yet earned
accrual basis
consistency
once an accounting method is chosen it should be used to all future accounting periods to enable meaningful comparison across periods
services paid or not yet paid
accrual
allowance for impairment of TR
prudence
