guiding concepts in SOFP

Question 1

what are the concepts needed in the SOFP?

Answer 1

• stable monetary convention
• objectivity convention
• historic cost
• dual aspect convention
• money measurement
• matching concept

Question 2

what is the stable monetary convention?

Answer 2

the concept that the value of money will not change over time

Question 3

what is wrong with the table monetary concept?

Answer 3

it is becoming out of date due to currency inflation

Question 4

what is the objectivity convention?

Answer 4

(key to production of statements)

statements should be based on solid evidence, free from personal bias, verifiable meaning statements are more reliable

Question 5

what is the historic cost concept?

Answer 5

HC = original coast
you should record asset, liability or equity at its original cost
avoids subjectivity

Question 6

what does dual aspect convention mean?

Answer 6

states that every business transaction requires recordation in two different accounts
ensures statements balance
concept derived from accounting equation

Question 7

what is the money measurement concept?

Answer 7

states any business should only record an accounting transaction if it can be expressed in terms of money, transactions should be measured in monetary terms

Question 8

what is the matching concept?

Answer 8

requires that revenues and any related expenses are recognised together you match the expense to the sales revenue they helped create

Question 9

what are the rules of matching?

Answer 9

• include any accruals
• exclude payments in which benefit not received till future
• if incur expense but unsure whether it will bring future benefit, include in this years income statement

Question 10

what is the prudence principle?

Answer 10

being cautious e.g including anything you are unsure about

Question 11

what is the recognition concept?

Answer 11

only recognised when they have been realised, substantially compete