Accounting Theorys

Question 1

ACCOUNTING ENTITY

Answer 1

Business and owner are treated as two separate entities. All transactions are recorded from point of view of the business. Only business transactions affecting the business are recorded in the business books.

Question 2

MONETARY

Answer 2

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

Question 3

GOING CONCERN

Answer 3

A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down.

Question 4

ACCOUNTING PERIOD

Answer 4

The life of a business is divided into regular time intervals to allow financial statements to be prepared at fixed periods.

Question 5

HISTORICAL COST

Answer 5

Transactions should be recorded at their original cost.

Question 6

OBJECTIVITY

Answer 6

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

Question 7

CONSISTENCY

Answer 7

Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison.

Question 8

MATCHING

Answer 8

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

Question 9

REVENUE RECOGNITION

Answer 9

Revenue is recorded as earned when goods have been delivered or services have been provided.

Question 10

ACCRUAL BASIS OF ACCOUNTING

Answer 10

Business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period.

Question 11

PRUDENCE

Answer 11

Prudence theory states that assets and profits should not be overstated, and liabilities and losses should not be understated.

Question 12

MATERIALITY

Answer 12

Relevant information should be reported in the financial statements if it is likely to make a difference to the decision-making process.