Accounting theories/concepts Flashcards
Explain the accounting entity concept.
The business and its owner are treated as separate entities and only transactions related to the business are recorded.
Explain the accounting period concept.
The life of a business is divided into equal accounting periods for preparing financial reports.
Explain the accrual concept.
Income and expenses are to be recorded in the period that they are earned or incurred,regardless of whether cash is received or paid.
Explain the consistency concept.
The same accounting methods must be used from period to period so that the financial performance can be meaningfully compared.
Explain the going concern concept.
The business is assumed to have an indefinite economic life.
Explain the historical cost concept.
All transactions are recorded at the original cost to the business.
Explain the matching concept.
Expenses incurred in a given period must be matched against the income earned in the same period to determine the profit for the period.
Explain the materiality concept.
An item is considered material if it is likely to make a difference to the decision-making process. When the cost of an expenditure is immaterial, it will be regarded as a revenue expenditure even though the benefits last for more than one accounting year.
Explain the monetary concept.
Only transactions that can be measured in monetary terms are recorded.
Explain the objectivity concept.
Transactions are recorded based on information (from source documents) that is reliable and verifiable.
Explain the prudence concept.
A business must report and adjust for losses that it is likely to incur, so that profit and assets are not overstated.
