Module 2: Fundamental Accounting Concepts

Question 1

What are the fundamental accounting concepts?

Answer 1

• Basic assumptions considered in processing and presenting financial information

Question 2

What is Entity Concept?

Answer 2

• Business transactions are separate from business owner’s personal transactions

Question 3

What is Going Concern?

Answer 3

• Business entity will operate indefinitely unless stated/reported otherwise by the entity

Question 4

What is Accrual?

Answer 4

• Business transactions are recognized in the period they occurred
• Accrued Revenue: income earned but not yet received
• Accrued Expense: cost made but not yet paid
• Deferred Revenue: Income earned in advance but goods or services not yet delivered
• Prepaid/Deferred Expense: Cost paid in advance for expenses/goods to be received in the future
• Matching Principle: record expenses in the same period as the revenue they generate
• Adjusting Entries: adjust entries to make sure revenues and expenses are recorded in correct period

Question 5

What is Time Period?

Answer 5

• Overall life of business can be divided into several, shorter and equal periods

Question 6

What is Stable Monetary Unit?

Answer 6

• Assumes that the currency used in the entity’s financial reporting will remain stable