Fundamental Concepts

Question 1

Materiality

Answer 1

Materiality is a concept that determines whether the omission or misstatement of information in a financial report would impact a reasonable user’s decision-making

Question 2

Accounting Entity

Answer 2

Requires the owner of the business to keep their personal transaction separate from those of the business

Question 3

Historical Cost

Answer 3

Historical cost assumes that business transactions are recorded in terms of their cost at the time the transition occurred. Original monetary value, no inflation or loss of value.

Question 4

Monetary

Answer 4

The monetary convention states that an item must be able to be assign a monetary value before it can be recorded in an accounting system

Question 5

Accounting period assumption

Answer 5

Accounting period convention requires that the life of a business can be divided into equal periods of time for reporting business. Can’t be longer than a year

Question 6

Going concern

Answer 6

Convention assumes that business will continue to operate for the foreseeable future and its records should, therefore, be kept on that basis

Should not be followed if there is evidence of the business will close down the future
Assets should be shown in their liquidation value