Topic 13 - Concepts

Question 1

Name the 10 Concepts

Answer 1

Going Concern
Accruals
Prudence

Consistency
Realisation.                       
Business Entity
Materiality
Dual Aspect
Objectivity
Cost

Question 2

Explain the Going Concern concept

Answer 2

When Accounts prepared it’s assumed business will continue and assets are recorded at cosr

Question 3

Explain the Accruals Concept

Answer 3

It states that income statements should be based of income and expenditure not receipts and payments - so amounts due for the year rather than amounts which have gone through the bank and cash accounts

Question 4

Explain the Prudence Concept

Answer 4

This states that accountants must always consider the worst case scenario and understate rather than overstate profits and asset Values.

Question 5

Explain the Consistency Concept

Answer 5

This means that once a policy has been decided, the business should use the same policy for the subsequent years unless there is a good reason for changing.

PRUDENCE TAKES PRIORITY THO

Question 6

Explain the realisation concept

Answer 6

Sales recorded when customer physically removes goods and sales invoice raised and purchases when supplier delivers good, regardless of payment being made

Question 7

Explain the Business Entity concept

Answer 7

The owner should be considered completely separate from the business

Question 8

Explain the materiality concept

Answer 8

This is relevent when deciding when making the distinction between capital + revenue items. Only necessary when making a significant difference

Question 9

Explain the dual aspect concept

Answer 9

This is referring to the double entry system - Every Dr has a Cr so accounts must always balance

Question 10

Explain the Objectivity concept

Answer 10

Accountants must not show personal bias and transactions should be based on evidence such as source documents especially when valuating assets

Question 11

Explain the Cost concept

Answer 11

Assets are on the s.f.p at historical cost which is how much they paid but also any one off costs such as import fees, transportation or installation

Question 12

What is revenue expenditure?

Answer 12

Spending on the everyday trading activities of a business

Question 13

What are Revenue Receipts?

Answer 13

Incomes derived from the usual activities of the business

Question 14

Explain what revenue items are

Answer 14

These will happen on a:

Regular basis
Repairs
Renewals
Redecoration
Replacement
Rent

Go in Income Statement

Question 15

What is Capital Expenditure?

Answer 15

Spending on Non current assets or improvement of them

Question 16

What are Capital Receipts?

Answer 16

Transactions that are not the usual activities of the business, such as receipts from sale of assets

Question 17

Why should Closing Inventory be valued if the lowest possible value

Answer 17

This is so profits + assets are not overstated.

Question 18

How are inventories valued?

Answer 18

They must be valued at the lower of cost or net realisable value

Question 19

What is the definition of Cost?

Answer 19

How much the business originally paid for goods

Question 20

What does Net realisable Value mean (NRV)

Answer 20

This is how much the goods could be sold for, less any costs in making the goods into a saleable condition