Accounting chapter 10 (Accounting Rules)

Question 1

Why is accounting principles important?

Answer 1

It is important to ensure records are reliable to make quality decision making

Question 2

Define business entity / accounting entity?

Answer 2

The business should be treated completely separately from the owner of the business.

Question 3

Define the principle of cosistency?

Answer 3

Once a method has been selected, the method must be used consistently from one accounting period to the next.

Question 4

Define the principle of duality?

Answer 4

Double entry-transactions are recorded in the accounting records

Question 5

Define the principal of going concern?

Answer 5

The accounting records are always maintained on the basis of assumed continuity as it is assumed that the business will operate for an indefinite amount of time.

Question 6

Define principle of historical cost?

Answer 6

The historical cost principle requires that all assets and expenses are initially recorded in the ledger accounts as their actual cost.

Question 7

Define principal of matching principle?

Answer 7

The revenue of the accounting period is matched against the costs of the same period.

Question 8

Define principal of materiality?

Answer 8

When an item of a very low value is listed as an expense instead of an asset due to the low value and lack of benefits

Question 9

Define principle of Money measuerment?

Answer 9

Only information which can be expressed in terms of money can be recorded in the accounting records.
Aspects like (Morale of the work force and the effectiveness of a good manager) can not be recorded.

Question 10

Define principle of Money measurement?

Answer 10

Only information which can be expressed in terms of money can be recorded in the accounting records.

Question 11

Define principle of prudence?

Answer 11

Accountants should ensure that profit and assets are not overstated and that liabilities are not understated. Never anticipate a profit but account for all possible losses.

Question 12

Define principal of realisation?

Answer 12

The realization principle emphasizes the importance of not recording a profit until it has actually been earned

Question 13

What is the importance of International accounting standards?

Answer 13

Ensures that financial statements are prepared using the same rules and guidelines internationally

Question 14

What are the 4 International accounting standards?

Answer 14

Comparability, relevance, reliability and understandability

Question 15

Define comparability?

Answer 15

Financial statements can be useful if it can be compared with similar information about the same business for another accounting period or at another point of time

Question 16

Define Rlevance?

Answer 16

It is important for information to be provided in time for decisions to be made

Question 17

Define reliablity?

Answer 17

The information provided in a financial statement can be reliable if it is:
. Capable of being independently verified
. Free from bias
. Free from significant errors

Question 18

Define understandability?

Answer 18

It is important that the information is clear so that it could be understood by the users of those statements

Question 19

Define Capital expenditure?

Answer 19

Capital expenditure is money spent by a business on purchasing non-current assets and improving or extending non-current assets. For example (The purchase of new furniture, Upgrading a new function to a machinery).

Question 20

Define revenue expensiture?

Answer 20

Revenue expenditure is money spent on running the business on a day-to-day basis.

Question 21

Define Capital receipt?

Answer 21

Capital receipt occurs when money is received other than from normal trading activities. For example ( Receipt of capital from the owner, receipt of loans and the proceeds of sale of a non-current asset)
The capital receipt also should not be entered in the income statement except for profit/loss made on the sale of a non-current asset.

Question 22

Define revenue receipt?

Answer 22

Revenue receipt is money received by a business from normal trading activities. For example (Revenue from the sale of goods, fees from clients and other income like rent received and so on).
They are entered in the income statement

Question 23

How is inventory valued?

Answer 23

Inventory is valued at the lower of Cost or Net realisable value (NRV)

Question 24

Define the cost of the inventory?

Answer 24

The actual purchase price plus any additional costs (such as carriage inwards) incurred in bringing the product to the customer in the current condition

Question 25

Define the Net realisable value (NRV)

Answer 25

NRV is the estimated receipts from the sale of the inventory minus any costs of completing the goods or costs of selling the goods.