Accounting and Finance - Accounting Concepts

Question 1

Explain the need for accounts to achieve a ‘true and fair’ view of the business?

Answer 1

It ensures and assesses whether accounts do accuratetly portray the business’ activities

Question 2

Explain the need to comply with the Generally Accepted Accounting Practice (GAAP)?

Answer 2

• stakeholders will look at accounts in order to make decisions and can make comparisons

Question 3

What are the accounting conventions?

Answer 3

• Consistency
• Going concern
• Matching (accruals)
• Materiality
• Objectivity
• Prudence (conservatism)
• realisation

Question 4

What does the AC of consistency mean?

Answer 4

all accounts will be produced the same way
it means that any person using the accounts can be confident that the information within the accounts is more likely to be accurate

Question 5

what does the AC of going concern mean?

Answer 5

assumes that the business is operating as normal and that there is no reason not to expect it to operate as normal in the future

Question 6

What does the AC of matching (accruals) mean?

Answer 6

timing of information put into the accounts is important
dates used to record financial transactions when they occurred NOT when the payment was made –> more realistic

Question 7

what does the AC of materiality mean?

Answer 7

concerned with the big picture
calculating the value of the business requires a realistic figure to be met only calculating values of assets that make a big difference

Question 8

what does the AC of objectivity mean?

Answer 8

accounts must be realistic and based on facts, not opinions or guesses
avoiding false statements, bias or values

Question 9

what does the AC of prudence (conservatism) mean?

Answer 9

not overstating financial situation
being cautious, not overstating situation and being pessimistic to not overestimate profit/losses

Question 10

what does the AC of realisation mean?

Answer 10

takes place when the legal ownership changes hands and not when the payment is made
e.g. goods/services are ‘realised’ when any legal entitlement is exchanged

Question 11

what principles should be adhered to in GAAP?

Answer 11

• economic entity assumption
• accrual basis accounting
• monetary unit assumption
• full disclosure assumption
• time period assumption
• revenue recognition assumption
• matching principle
• cost principle
• going concern principle
• relevance, reliability, consistency
• conservatism
• materiality

Question 12

evaluate the usefulness of accounting conventions

Answer 12

• provide a real image of how the business is doing
• shows the accurate revenues earned by the business and predicts the trend of cash flows in the business
• helps business to keep a record of its financial statements –> prevents skipping of necessary information