Concepts and 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 business will CONTINUE to operate for the foreseeable future
• ASSET values in the balance sheet will assume to continue, shown at original cost
• When a business is SOLD, there is no going concern and asset values will change to selling values.

Question 3

Explain the BUSINESS ENTITY concept

Answer 3

• SEPERATES the business entity from the owner. Business financial transactions recorded in business
• The owner’s interest is confined to the capital and its adjustments
• OWNER’S INTEREST
  
  • Capital
  • Profitability

Question 4

Explain the REALISATION (Recognition) concept

Answer 4

• Important NOT TO SHOW a profit until it has been earned
• Revenue is only received when the legal title of the goods passes from the seller to the buyer, buyer has obligation to pay
• Profit as being earned at a particular point
• Profit is not calculated on the basis of when cash is received or spent

Question 5

Explain the DUAL ASPECT concept

Answer 5

Assets and its claims against it. The double entry system where there is a DEBIT for every CREDIT

Question 6

Explain the ACCRUAL (Matching) concept

Answer 6

The income of one period is MATCHED to the cost of the same period and the timing of the cash receipts and payments is ignored. (Accrued and prepaid expenses)

Question 7

Explain the TIME INTERVAL concept

Answer 7

Final accounts must be prepared at REGULAR intervals. For internal management purposes they are be prepared more frequently

Question 8

Explain the MATERIALITY concept

Answer 8

Accounting is not serving a useful purpose if the recording of a transaction in a certain way is not worthwile

Question 9

Explain the PRUDENCE (Conservatism) concept

Answer 9

• PROFITS are not overstated and foreseeable LOSSES are allowed when preparing accounting statements
• FIXED ASSETS are not overstated in the balance sheet
• STOCK must be valued at lower of the cost or net realisable value

Question 10

Explain the CONSITENCY concept

Answer 10

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

Question 11

Explain the MONEY MEASUREMENT concept

Answer 11

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

Question 12

Name the FACTORS influencing the business’ performance but which can not be measured in monetary terms (MONEY MEASUREMENT CONCEPT)

Answer 12

• Good or bad MANAGERS
• Serious problems in the WORKFORCE
• RIVAL PRODUCTS
• Changing of government LAWS

Question 13

Explain the SUBSTANCE OVER FORM concept

Answer 13

• Real substance takes precedence over legal form

Question 14

What is objectivity?

Answer 14

Using a standard method which is generally accepted by the business world

Question 15

What is subjectivity

Answer 15

Using your own method which is not generally accepted

Question 16

What are SSAPSs?

Answer 16

Statements of Standard Accounting Practice

Question 17

What are FRs?

Answer 17

Financial Reporting standards