chapter 17: accounting principles

Question 1

list and explain 5 principles

H-MM-B-C-D

Answer 1

historical cost- principle that states that transactions should be recorded at their actual original cost
money measurement- principle that states that only transactions that can be expressed in monetary terms are recorded
business entity- principle that states that the owner and the business are 2 seperate entities, and, therefore, their financial transactions should be treated seperately
consistency- principle that states that accounting information must always be recorded using the same method
dual aspect (double entry)- for every debit entry, there must be a credit entry of the same value

Question 2

list and explain the last 6 principles

G-M-A/M-P-R-SO

Answer 2

going concern- principle that states that a business is seen as a going concern if it is to continue for the foreseeable future
materiality- principle that states that somethin should only be included in the financial statements if it would be of interest to the stakeholder
accrual/matching- principle that states that profits should be calcualted as the difference between revenue and expenses incurred in generating that revenue within a certain period, taking accruals and prepayments into account
prudence- principle that states that profits should not be overstated (allowed for foreseeable losses) and assets should not be over-valued
realisation- principle that states that profits(gains) can only be shown when it has actually been earned. revenue(income) is only realised when the legal title of the goods passes from the seller to the buyer.
substance over form- principle that states that where the legal form and real substance of a transaction differ, accounting should show the transaction according o its real substance. (how thw transaction affects the economic situation of the business)

Question 3

explain the difference between capital expenditure and capital receipts

Answer 3

capital expenditure- money spent to buy or add value to non-current assets
capital receipts- money received from the sale of non-current assets

Question 4

explain the difference between revenue expenditure and revenue receipts

Answer 4

revenue expenditure- money spent on expenses for day-to-day running of the business
revenue receipts- moey received from ordinary activities of the business