Chap 10,11 Flashcards
Prudence theory
The accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities and losses. When the net realizable value falls below the cost of inventory, the business must reduce the value of inventory and record the potential loss as an expense. This expense is known as an impairment loss on inventory. Hence, assets and profits are not overstated
Matching theory
Expenses incurred must be matched against income earned in the same period to determine the profit for the year
Differences between capital and revenue expenditure (1)
Capital expenditure refers to the cost to buy and bring the non-current asset to its intended use while revenue expenditure refers to the costs to operate, repair, and maintain the non-current asset in working condition
Differences between capital and revenue expenditure (2)
Capital expenditure provides benefits for more than 1 year whereas revenue expenditure provides benefits that will be used within 1 year.
Differences between capital and revenue expenditure (3)
Capital expenditure is recorded as a non-current asset in the statement of financial position while revenue expenditure is recorded as an expense in the statement of financial performance
Materiality theory
When the cost of expenditure is small relative to the size of the business and does not affect decision making, it will be treated as an expense even though the benefits last for more than 1 year
Consistency theory
Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaning comparison over time
Matching theory
A portion of the cost of using the non-current asset should be matched against the income earned from using the non-current asset in the same financial period to determine accurate profit for the period
Define depreciation
The allocation of the cost of the non-current asset over its estimated useful life
