Exam Prep - Accounting concepts and conventions

Question 1

What are the purposes of regulations?

Answer 1

• true and fair view

- required to produce accounting info in an approved format and timescale

Question 2

What are the sources of accounting rules?

Answer 2

• International Accounting Standards Board
• Company Law
• Financial Conduct Authority

Question 3

What is the first Accounting Convention?

Answer 3

• Business/Company Entity

Question 4

What are the concepts of business/company entity?

Answer 4

• Affairs of the business should be kept separately from the owners
• when starting a business, open a separate bank account

Question 5

What is the second accounting convention?

Answer 5

Historic Cost

Question 6

What are the concepts of historic cost?

Answer 6

• Assets and liabilities should be recorded at cost

- Not always rigidly adhered to - it can be acceptable to revalue non-current assets

Question 7

What is the third accounting convention?

Answer 7

Prudence

Question 8

What are the concepts of prudence?

Answer 8

• accounts should be present least favourable view
• exercise caution when making accounting judgements
• being overly prudent could lead to poor decision making
• lower of cost and net realisable value

Question 9

What is the fourth accounting convention?

Answer 9

Going concern

Question 10

What are the concepts of going concern?

Answer 10

• assumption that business will continue for the foreseeable future (usually 12 months)
• if business is not considered a going-concern, accounting rules would have to be changed

Question 11

What is the fifth accounting convention?

Answer 11

Duel Aspect

Question 12

What are the concepts of duel aspect?

Answer 12

Every transaction will affect two accounts

Question 13

What is the sixth accounting convention?

Answer 13

money measurement

Question 14

What are the concepts of money measurement?

Answer 14

Accounts are restricted to matters which can be measured in money terms
- cannot place a money value on things such as ‘employee loyalty’ so cannot include in accounts

Question 15

What is the seventh accounting convention?

Answer 15

Consistency

Question 16

What are the concepts of consistency?

Answer 16

Figures should be comparable from one year to the next

- accounting policies should not change from one year to the next, unless there is a good reason

Question 17

What is the eighth accounting convention?

Answer 17

Accruals

Question 18

What are the concepts of accruals?

Answer 18

Costs are accounted for as they are incurred, regardless of when money is paid

Question 19

What is the ninth accounting convention?

Answer 19

Realisation

Question 20

What are the concepts of realisation?

Answer 20

Income is recognised as and when it is earned, not when payment is received
- a sale is recorded when made, whether or not the customer pays cash or pays later

Question 21

What is the tenth accounting convention?

Answer 21

Materiality

Question 22

What are the concepts of materiality?

Answer 22

Adjustments are only made to ‘material’