Applications of Accounting Concepts

Question 1

Business Entity

Answer 1

capital & drawings on the statement of financial position, no personal income, expenditure, assets or liabilities in the business’s financial statements

Question 2

Money Measurement

Answer 2

it is not possible to record employee loyalty or the quality of goods and services, as they cannot be recorded in money terms

Question 3

Duality

Answer 3

any examples of double entry, the trial balance and statement of financial position should balance

Question 4

Materiality

Answer 4

small expense items are grouped together as ‘general expenses’ or ‘sundries’, low cost non-current assets are treated as expenses.

Question 5

Cost

Answer 5

expenses and non-current assets are listed at cost.

Question 6

Going concern

Answer 6

the net book value of non-current assets assumes they will be used for several years

Question 7

Accrual

Answer 7

income and expenses are adjusted for prepayments and accruals, adjustments for opening & closing inventory and depreciation over the life of a non-current asset

Question 8

Consistency

Answer 8

method and rate of depreciation is applied to all items of machinery, all vehicles, etc.

Question 9

Realisation

Answer 9

sales and purchases are included in the income statement even if not paid for. Goods sold on ‘sale or return’ are not included until sold by the second business.

Question 10

Prudence

Answer 10

valuing inventory at the lower of cost and net realisable value, estimates of accruals and prepayments, estimates of life time and residual value of non-current assets.