Concepts And Conventions Relevant To The Income Statement

Question 1

What is the Accounting Period?

Answer 1

A convention that businesses divide their financial activities into time periods eg financial year

Question 2

What is the Realisation Concept?

Answer 2

Revenues/expenses can only be recognised once they have been earned/incurred

Question 3

What is the Going Concern concept?

Answer 3

Financial statements are prepared assuming the business will continue operating in the future for at least 12 months.

Question 4

What is the Faithful Representation concept?

Answer 4

Financial statements reflect a ‘true and fair view’. They must be complete, unbiased and free from error.

Question 5

What is the Materiality concept?

Answer 5

The Materiality concept requires those who prepare the financial statements to include items which could influence the decisions that users make.

However, financial statements result from processing and summarising, large numbers of transactions.

A figure, such as a minor expense may be immaterial , and therefore not recorded as a separate item, but instead included within the more significant expense category.