Conventions And Concepts

Question 1

Business entity

Answer 1

This concept requires that for accounting purposes the business and the owner are treated as separate entities

Question 2

Money measurement

Answer 2

This concept holds that accounting should only deal with those items that are capable of being expressed in monetary terms

Question 3

Historic cost

Answer 3

This concept requires that all assets should be recorded at their original historic (purchase) price

Question 4

Realisation

Answer 4

This convention requires that financial statements are prepared according to the time period to which a transaction relates and not when the cash is actually paid or received. Profit can only be recorded when it is realised’ either in the form of cash or another asset (receivables)

Question 5

Materiality

Answer 5

This convention requires that we only make adjustments for those items whose value is large enough to be relevant

Question 6

Going concern

Answer 6

This concept assumes that the business will continue operating into the foreseeable future (unless there are very clear reasons to believe otherwise)

Question 7

Consistency

Answer 7

This concept requires that we should always use the same accounting method or treatment (e.g. depreciation) for similar items

Question 8

Prudence

Answer 8

This concept holds that financial statements should err on the side of caution. This means that we should never anticipate or inflate revenues and profits but should always provide for losses or liabilities even if we have to estimate their values

Question 9

Accruals (matching)

Answer 9

This concept that income/profits for a time period are matched with expenses or losses for the same period