Week 2 - Accounting Concepts, Qualitative Characteristics and the accounting equation

Question 1

Accounting concepts

Answer 1

Basic assumptions that underlie the accounts

Question 2

Accounting standards

Answer 2

Technical rules that give guidance on how transactions should be accounted for

Question 3

Going concern concept

Answer 3

Assume the business will continue operating into the foreseeable future
All statements are prepared on this basis
Allows everything to be valued at historical cost (use net realisable value if business is unlikely to continue operating)

Question 4

Accruals concept

Answer 4

Transactions are recognised in the accounts when they take place, not when cash is received/paid

Question 5

Historical cost concept

Answer 5

Amounts in accounts are recorded at the original cost when the transaction took place

Question 6

Fair value concept

Answer 6

Change the value of assets/liabilities etc based on the value today, not when acquired

Question 7

Money measurement concept

Answer 7

only items which have a monetary value are included in the accounts

Question 8

Business entity concept

Answer 8

the business exists separately to its ownerss

Question 9

Time period/periodicity concept

Answer 9

The life of the entity can be divided into specific periods to allows for preparation of financial statements

Question 10

Qualitative characteristics

Answer 10

Aspects of financial information which make it useful to users and of high quality

Question 11

Relevance

Answer 11

FUNDAMENTAL qualitative characteristic
Capable of making a difference in the decisions made by users
It needs PREDICTIVE VALUE (can be used to make predictions) and CONFIRMATORY VALUE (can provide feedback about previous decisions)

Question 12

Materiality concept

Answer 12

Links to relevance
Only information which can make a difference to decision making should be included in the accounts, this depends on the size of the business

Question 13

Faithful representation

Answer 13

FUNDAMENTAL qualitative characteristic
Faithful representation of financial information
COMPLETENESS - statements must provide all information a user needs to understand the event
NEUTRALITY - no bias in the selection or presentation of info
FREE FROM ERROR - no errors or omissions in info

Question 14

Timeliness

Answer 14

ENHANCING qualitative characteristic

information is available to users in time to be of use to make decisions

Question 15

Comparability

Answer 15

ENHANCING qualitative characteristic

information is consistently reported to allow comparisons over time and between statements

Question 16

Verifiability

Answer 16

ENHANCING qualitative characteristic

different users agree that the event is faithfully represented

Question 17

Understandability

Answer 17

ENHANCING qualitative characteristic

Information should be clearly and concisely presented with complex transactions being explained clearly

Question 18

Prudence concept

Answer 18

Where income and profits are only recognised when they are certain but liabilities should be recognised when they are expected to arise

Question 19

Duality/dual aspect concept

Answer 19

Every transaction has two aspects and this is the basis for double entry book-keeping

Question 20

The accounting equation

Answer 20

Assets-Liabilities=Equity

OR A=L+E

Question 21

The extended accounting equation

Answer 21

Assets-Liabilities=Opening Equity+Revenue-Expenses