chapter 10 - accouning rules

Question 1

definition of:

accounting principles

Answer 1

referred to as concept (a rule which sets down how financial activities of a business are recorded) and convention (an acceptable method by which the rule is applied to a given situation)

Question 2

definition of:

business entity

Answer 2

business is treated as being completely separate from owner of business

Question 3

definition of:

consistency

Answer 3

accounting methods must be used consistently from one accounting period to the next

Question 4

definition of:

duality

Answer 4

every transaction is recorded twice - once on the debit side and once on the credit side

Question 5

definition of:

going concern

Answer 5

accounting records are maintained on the basis that the business will continue for an indefinite period of time

continuity:
nca will be shown at book value - original cost less depreciation; inventory appear at lower cost or net realisable value

closing down in future:
assets will be shown at expected sales values

Question 6

definition of:

historic cost

Answer 6

all assets and expenses are initially recorded at their actual cost

-this principle difficult to make comparison bcs of the effect of inflation

Question 7

definition of:

matching

Answer 7

revenue of accounting period is matched against cost of the same period

Question 8

definition of:

materiality

Answer 8

the individual items which will not significantly affect either profit or assets of business don’t need to be recorded separately

-low value items

Question 9

definition of:

money measurement

Answer 9

only information which can be expressed in terms of money can be recorded in accounting records

Question 10

definition of:

prudence

Answer 10

profits and assets shouldn’t be overstated and losses and liabilities shouldn’t be understated

Question 11

definition of:

realisation

Answer 11

revenue is only regarded as being earned when legal titles to goods passes from seller to buyer

Question 12

objective of accounting standard

Answer 12

ensure users of financial statements are protected and not misled

Question 13

definition of:

comparability

Answer 13

info contained in financial statements can be useful if it can be compared with similar info abt the same business for another accounting period

-same policies must be used to compare

Question 14

definition of:

relevance

Answer 14

• info can be used to confirm, or correct, prior expectations abt past events
• help forming, revising or confirming expectations abt future

Question 15

definition of:

reliability

Answer 15

• free from bias
• free from significant errors
• capable of being independently verified
• prepared with suitable caution being applied to any judgements and estimated which are necessary
• capable of being depended upon by users as being a true representation of the underlying transactions and events which it is representing

Question 16

definition of:

understandability

Answer 16

can be understood by users of those statements; depends on clarity of info provided; info shouldn’t be omitted as it might be too difficult for users to understand

Question 17

definition of:
capital expenditure

examples?

Answer 17

money spent on purchasing, improving or extending nca

• all legal costs involved in purchase of nca
• delivery costs

Question 18

definition of:
revenue expenditure

examples?

Answer 18

money spent on running a business on a day-to-day basis

• administration expenses
• selling expenses
• financial expenses
• costs of goods purchased for resale

Question 19

definition of:
capital receipt

examples?

Answer 19

money received by a business from a source other than normal trading activities

• receipt of loans
• proceeds of sale of nca
• receipt of capital from owner

Question 20

definition of:
revenue receipt

examples?

Answer 20

money received by business from Norma, trading activities

• sale of goods
• fees from clients
• rent received, commission received, discount received

Question 21

inventory valuation

Answer 21

inventory always valued at lower of cost or net realisable value (principle of prudence)

Question 22

definition of:

net realisable value

Answer 22

the estimated receipts from sale of inventory, less any costs of completing the goods or costs of selling the goods

Question 23

definition of:

cost of inventory

Answer 23

he actual purchase price plus any additional costs (carriage inwards) incurred in bringing the inventory to its present position and condition

Question 24

effect on financial statements:

recording capital expenditure as revenue expenditure in income statement

Answer 24

expense overstated, profit for the year understated

Question 25

effect on financial statement:

recording capital expenditure as revenue expenditure in balance sheet

Answer 25

nca understated, owner’s capital (profit) understated