Topic 2: Accounting Concepts and Principles

Question 1

1. Define accounting entity concept

Answer 1

It states that the business and the owner must be treated as separate entities.

Question 2

2. Define monetary concept

Answer 2

It states that only transactions that can be measured in money terms can be recorded in the business’ books.

Question 3

3. Define historical cost concept

Answer 3

It states that transactions are recorded at their original costs.

Question 4

4. Define objectivity concept

Answer 4

It states that all business transactions must be supported by objective evidence to act as proof that the transaction has taken place.

Question 5

5. Define going concern concept

Answer 5

It states that a business is assumed to continue operating for a indefinitely.

Question 6

6. Define accounting period concept

Answer 6

It states that the life of the business is divided into equal periods of time.

Question 7

7. Define accrual concept

Answer 7

It states that all income and expenses are to be included in the period where they are earned and incurred, regardless whether cash has been paid or received.

Question 8

8. Define matching concept

Answer 8

It states that expenses incurred must be matched with the revenue earned in the same accounting period to calculate the true profit or loss.

Question 9

9. Define consistency concept

Answer 9

It states that business is to use the same accounting principles and concepts between periods to enable a meaningful comparison over time.

Question 10

10. Define prudence concept

Answer 10

It states that business should not overstate its profits and assets and understate liabilities and losses.

Question 11

11. Define materiality concept

Answer 11

It states that information is considered to be material if it has a serious effect on decision-making.