Theories

Question 1

Explain Accounting entity theory

Answer 1

Activities of a business are separate from the actions of the owner. All transactions are recorded in the POV of the business

Question 2

What theory is this?

Life of a business is divided into regular time intervals

Answer 2

Accounting period theory

Question 3

Explain Accrual basis of accounting theory

Answer 3

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

Question 4

What theory is this?

Once an accounting method is chosen it will be applied to all future accounting periods to enable meaningful comparison

Answer 4

Consistency theory

Question 5

Explain Going concern theory

Answer 5

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

Question 6

Explain Historical cost theory

Answer 6

Transactions should be recorded at their original cost

Question 7

What theory is this?

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

Answer 7

Materiality theory

Question 8

What theory is this?

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

Answer 8

Monetary theory

Question 9

Explain Objectivity theory

Answer 9

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

Question 10

Explain Prudence theory

Answer 10

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

Question 11

Explain Revenue recognition theory

Answer 11

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