Accounting Theory and their General Explanations

Question 1

Accounting Entity

Answer 1

The activities of a business are separate from the activities 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

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 comparisons

Question 5

Going Concern

Answer 5

A business is assured 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

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

Answer 10

Accounting information recorded must be supported, be 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 has been delivered or services have been provided