Accounting Concepts & Principles

Question 1

Explain the Cost Concept

Answer 1

Implies that fixed assets and stock should always be shown at cost price. Serves as a basis for all asset calculations

Question 2

Explain the Going Concern (Assumed continuety) concept

Answer 2

Implies that the business will continue to operate for the foreseeable future. The asset values on the Balance sheet will assume to continue, therefore fixed assets are shown at their cost price.

Question 3

Regarding the Assumed continuety (Going Concern) concept, what happens if a business is sold?

Answer 3

There are no going concern values and the values of the assets will change to the value it will be sold for

Question 4

Explain the Business Entity concept

Answer 4

This seperates the existence of the business and the owner. Only financial transactions of the business are recorded in the books. The recorded interest of the owner in the business is confined to Capital and its adjustments

Question 5

Explain the Realisation (Recognition) concept

Answer 5

It is important not to show a profit until it has actually been earned. Revenue is only realised when legal titles of the goods passes from the seller to the buyer, who then has to obligation to pay. Profit is not calculated on the basis of when cash is paid or received.

Question 6

Explain the Dual Aspect concept

Answer 6

Assets and its claims against it. The double entry system where there is a debit and credit entry for each transaction. Remember that A = OE + L

Question 7

Explain the Time Interval concept

Answer 7

Final accounts must be prepared at regular intervals of 12 months. For internal management purposes they may be prepared more frequently.

Question 8

Explain the Accrual (MATCHING) concept

Answer 8

The income of one period is matched against the cost of the sime period and the timing of cash receipts and payments is ignored. That is why we take accrued and prepaid expenses into consideration

Question 9

Explain the Materiality concept

Answer 9

Accounting is not serving a useful function if the recodring of a transaction in a certain way is worthless

Question 10

Explain the Prudence (conservatism) concept

Answer 10

Profits are not overstated and foreseeable losses are allowed when preparing the accounting statements. The value of assets are not overstated in the balance sheet

Question 11

Explain the Consistency concept

Answer 11

Keeping to the same method of recording transactions, except in special cases

Question 12

Explain the Money Measurement concept

Answer 12

Only information which can be recorded in terms of money is recorded in accounting statements

Question 13

Name the factors which can influence the business’ preformance but which can not be measured in monetary values

Answer 13

• Good or bad managers
• Serious problems in the workforce
• Rival products stealing customers
• Changing of government laws

Question 14

Explain the Substance over form concept

Answer 14

If the legal form of a transaction differs from its real form or substance, the transaction should be shown at its real value. Where real substance take s precedence over its legal form

Question 15

Differenciate between objectivity and subjectivity

Answer 15

Objectivity: Using a standard method accepted by the business world

Subjectivity: Using your own method which is not generally accepted

Question 16

What are SSAPs?

Answer 16

Statements of Standard Accounting Practice

Question 17

What are FRs?

Answer 17

Financial Reporting Standards