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 a regular time intervals

Question 3

Accrual basis of accounting

Answer 3

Business activities that have occured, regardless of wether cash is paid or received, should be recorded into the relevant accounting period

Question 4

Consistency

Answer 4

Once an accounting method is chosen, the 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

Materiality

Answer 7

A transaction is considered material if it makes a difference to the decision-making process

Question 8

Monetary

Answer 8

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

Question 9

Matching

Answer 9

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

Question 10

Objectivity

Answer 10

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

Question 11

Prudence

Answer 11

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

Question 12

Revenue recognition

Answer 12

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