Accounting theories (IMPT)

Question 1

Explain the Accounting entity theory

Answer 1

The activities of the business are separate from the actions of the owner. All transactions are recorded from the point of view of the business

Question 2

Explain the Accounting period theory

Answer 2

The life of a business is divided into regular time intervals

Question 3

Explain the Accrual basis of accounting theory

Answer 3

Business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period

Question 4

Explain the going concern theory

Answer 4

A business is assumed to have an indefinite lifespan unless there is credible evidence that it may close down.

Question 5

Explain the historical cost theory

Answer 5

Transactions should be recorded at their original cost

Question 6

Explain the matching theory (Hint: How profit is derived)

Answer 6

Expenses incurred must be matched giant the income earned in the same period to determine the profit earned for that period

Question 7

Explain the monetary theory

Answer 7

Only business transactions that can remeasured in monetary terms are recorded

Question 8

Explain the objectivity theory (GQ: What should we ensure in recording accounting information?)

Answer 8

Accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases

Question 9

Explain the prudence theory (GQ: what accounting treatment should we use?)

Answer 9

The accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities and losses

Question 10

Explain the revenue recognition theory (GQ: How is revenue earned?)

Answer 10

Revenue is earned when goods have been delivered or services have been provided