Principles

Question 1

Accrual Concept

Answer 1

Revenues and expenses are recognized in the profit or loss account in the period when they are earned or incurred, not when they are received or paid.

Question 2

Business Entity Concept

Answer 2

A firm and its owner are separate entities. Transactions between the firm and the owner(s) should also be recorded. Owner’s personal assets should not be recorded in the books of his business.

Question 3

Consistency Principle

depreciation method

Answer 3

Same accounting treatment should be applied on similar items across financial periods. A change is allowed only if it will result in a more true and fair view of the firm’s position.

Question 4

Going Concern Concept

Answer 4

An entity is assumed to continue its operation in the foreseeable future and has neither the intention nor the need to liquidate or reduce its scale of operations significantly. If expected to operate in the foreseeable future, its assets should be reported at the historical cost of acquisition or production in the statement of financial position. If expect to liquidate, report at liquidation value/ market value/ realizable value

Question 5

Historical Cost Concept

Answer 5

Assets should be recorded at their cost of acquisition or production (when the business is going concern). Subsequent changes in their market values should be ignored.

Question 6

Matching Concept
(charging depreciation on NCA, determining depreciation method/rate)

Answer 6

Expenses recognized in each period have to match the revenues that they generate in the same period

Question 7

Materiality Concept

determine whether treat it as NCA or written off as expense in the current period

Answer 7

If an item is immaterial (insignificant) and thus would not make a difference to the users’ decision-making, it is justifiable to write the item off as an expense in when it is incurred.

Question 8

Money Measurement Concept (explain why staff capability should not be recorded in financial statements)

Answer 8

Only transactions that can be quantified in terms of money terms should be recorded in the financial statements

Question 9

Objectivity

Answer 9

Accounting information should be based on facts and be verifiable, not on personal opinion or subjective estimation.

Question 10

Prudence Concept
(lower of cost of net realizable value, allowance for doubtful accounts, not maintaining goodwill account)

Answer 10

When choosing among accounting alternatives, the best choice is one that is least likely to overstate assets, revenue and profits and understate liabilities, expenses and losses. If the future economic benefit of an item is not reasonably certain, it should not be recorded as an asset.

Question 11

Realization Concept

(determine whether to record money received as deposit from customers (CL) / revenue earned.

Answer 11

Revenue should be recognized only when (i) goods are delivered or services are provided, and (ii) accepted by the customers, not when money or order is received.

Question 12

Timeliness

Answer 12

A business should disclose its financial information as soon as possible, so that the information is useful and relevant for decision-making.