Ch 2 Accounting Concepts, Bases And Policies

Question 1

Going-Concern Concept

Answer 1

• it is assumed that the business for which accounts are prepared is solvent and viable.
• business is regarded as capable of operating into the future.

Question 2

The Accruals Concept

Answer 2

• all revenue income and expenditure for a particular period of time ha to be included in the accounts whether it has received, paid or not
  Due (accruals)

Question 3

Rent due vs rent prepaid

Answer 3

Rent due must be included in this year’s accounts as it is owed for this year

Rent prepaid must not be included in this year’s account as the payment refers to next year

Question 4

The Consistency Concept

Answer 4

• if a business has used an accounting method for the treatment of a particular item, then it is assumed that it will continue to use this method in the future,
  Eh straight line method of depreciation

-any change in the accounting method must be disclosed

Question 5

The Prudence Concept (careful/cautious)

Answer 5

-revenue and profits are included in the accounts only h when they are realised (or there is reasonable ‘certainty’ of realising them).

-costs are included when there is a reasonable ‘possibility’ of incurring them.

-caution must be exercised so as not to overstate the profits and understate losses.