Accounting Theories

Question 1

Accounting Entity
(Chapter 3)

Answer 1

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

Question 2

Accounting Period
(Chapter 5)

Answer 2

The life of a business is divided into regular time intervals.

Question 3

Accrual Basis of Accounting
(Chapters 6 & 7)

Answer 3

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

Question 4

Consistency
(Chapter 11)

Answer 4

Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison.

Question 5

Going Concern
(Chapter 5)

Answer 5

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

Question 6

Historical Cost
(Chapter 2)

Answer 6

Transactions should be recorded at their original cost.

Question 7

Matching
(Chapters 7, 10, & 11)

Answer 7

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

Question 8

Materiality
(Chapter 11)

Answer 8

A transaction is considered material if it makes a difference to the decision-making process.

Question 9

Monetary
(Chapter 2)

Answer 9

Only business transactions that can be measured in monetary terms are recorded.

Question 10

Objectivity
(Chapter 2)

Answer 10

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

Question 11

Prudence
(Chapters 9, 10, & 11)

Answer 11

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

Question 12

Revenue Recognition
(Chapter 6)

Answer 12

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