Concepts

Question 1

In accounting the business is treated as a separate entity from its owners - regardless of legal form of business.

Answer 1

Business Entity

Question 2

Accounting normally only deals with those items which are capable of being expressed in monetary terms.

Answer 2

Money Measurement

Question 3

Value of an asset is shown on the statement of financial position as historic or acquisition cost.

Reduces issues with subjectivity

Answer 3

Historic Cost

Question 4

Revenue is recognised and recorded in the period in which they are realised; similarly to accrual basis accounting.

We realise our revenues when we have delivered the product to customers, or the services have been rendered to them.

Answer 4

Realisation

Question 5

Caution should be exercised when making accounting judgments

Financial statements should err on the side of caution or pessimism, where uncertainty exists.

Gains understated; losses overstated

This should always prevail over other concepts

Answer 5

Prudence

Question 6

Accounting recognises that transactions take place in a time period, regardless of the date of payment or receipt of monies.

So expenses are matched to the sales that earned them, in a period of time

Answer 6

Accruals

Question 7

Accounts are prepared on the basis that the business will continue operations for the foreseeable future. i.e the business is not about to be liquidated

Answer 7

Going concern

Question 8

Financial statements should be based on … evidence, as far as possible. i.e any element of personal bias or opinion should be minimised.

Answer 8

Objectivity

Question 9

This concept requires that the same accounting treatment be applied when dealing with similar items not only in the same period but also from one period to the next.

The firm should continue to use the same treatment unless it has good reason to change, in which case it should state the change(s) in the financial statements.

Answer 9

Consistency

Question 10

This concept applies when the value of an item is relatively unimportant and does not warrant separate recording. This usually applies to small items where it is not economical to spend a lot of money recording and dealing with a very small amount of money.

Answer 10

Materiality

Question 11

What is the purpose of the share premium account

Answer 11

Another reserve which belongs to the shareholders but is created when a company issues shares above the nominal value; it is the profit it made from the shares.

Question 12

What is the difference between capital reserve and revenue reserve

Answer 12

Capital reserves are profits generated from the non-operating activities during a period of time examples buying a new building

Revenue reserve are profits generated from the operating activities during a period of time (retained profits) example is dividends