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Accounting - module 2 - unit 2
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- 1What is the going concern concept?This concept assumes that a business will continue to trade normally for the foreseeable future, unless the owners apply to go into bankruptcy or administration.
- 2What impact does th going concern concept have on the balance sheet?-Non-current assets are valued at their cost less depreciation.
-Capital is calculated as assets less liabilities.
-The value of the capital will be equal to net assets. - 3What is the cost concept?An asset should be recorded in the balance sheet at its cost, and this should include:
-The cost of purchase
-Delivery cost
-Installation cost - 4What is the consistency concept?Consistency means that the financial statements are prepared using the same accounting policies from one year to the next, to ensure they can be truthfully and fairly compared overtime.
- 5What is the benefit of applying the consistency concept?This prevents the owner from changing the accounting policies to influence the value of profits and capital unfairly and dishonestly, which will mislead potential investors.
- 6Why may the trader ignore consistency when depreciating a fixed asset?If the straight line method is used to depreciate a fixed asset, the trader may switch to the reducing balance in the later years of the asset's life to boost profits, as it will generate a lower depreciation charge.
- 7What is the prudence concept?The prudence concept implies that losses should be recognised as soon as they are known and profits only when they are proven. This is to ensure that profit and asset values are not overestimated, and the capital base is protected from overspending.
- 8What is the risk of over-estimating profit?The owner may spend and withdraw more cash than is prudent, and this may cause the business to become insolvent or be declared bankrupt because creditors cannot be paid as debts fall due.
- 9What is the matching concept?Revenue and expenses should be matched to the accounting period in which they were generated from when calculating profit. This means that items are adjusted for accruals and prepayments, which are calculated using APES.
- 10What is the concept of business entity?The business has a seperate entity to its owner in its own right.
The owner's private transcations are treated separately from business transactions. - 11How are drawings dealt with using the business entity concept?The drawings of an owner must be treated as a deduction from capital, and not as a deduction from profits.
The amount should be debited to the drawings account and credited to the asset account. - 12What is the realisation concept?This concept states that revenue is considered to have been earned by the trader on the date it has been realised. This is when the goods have been accepted by the customer from the supplier.
- 13What is a benefit of applying the realisation concept?This prevents the owner from recording revenue and profits on goods before they have been sold or delivered to a customer.
- 14What is the materiality concept?The accountant must deal with a financial transaction in accordance to the normal accounting procedure, UNLESS the amount involved is too insignificant to have a material impact on the financial statements.
- 15Why must non-current assets be depreciated, according to the materiality concept?Non-current assets should be depreciated over their useful life, because failure to do so would have a material impact on the profit, asset and capital values.
- 16Why may a business treat the purchase of office staplers of revenue expenditure rather than capital expenditure?Even though staplers will benefit the business for more than one year, the amount involved is too small to materially affect the financial statements.
- 17What is the concept of objectivity?This concept implies that financial statements should be objective - based on facts, should be prepared in a format that is universally accepted, and can therefore be understood by a variety of users.
- 18What is the benefit of applying the objectivity concept?It avoids potential investors being misled.
- 19What is the purpose of accounting concepts?To ensure that the accounts represent a true and fair view of the assets, capital, liiabilities and profit of a business.
- 20In accounting, what is meant by true and fair?-Truth implies that the accounting treatment can be proven e.g. the purchase of an asset can be proven by an invoice provided by the supplier.
-Fairness implies that the accounting treatment is reasonable e.g. the depreciation of non-current assets.
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- A-levels Accounting - Module 2 Fichas sobre Accounting - module 2 - unit 2, creado por Amardeep Kumar el 08/05/2015.
- Creado por
- Amardeep Kumar
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