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Accounting concepts and assumptions

13 important questions on Accounting concepts and assumptions

What is the historical cost concept?

Valuing assets by reference to cost, expressed at original cost.

What are the accounting concepts?

A set of rules which lay down the way in which the transactions of the business are recorded. They seek objectivity and consistency in how information is prepared and presented.

What is the money measurement concept?

It means that accounting can never tell you everything about a business.
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What is the dual aspect concept?

This states that there are two aspects of accounting, one represented by the assets of the business and the other by the claims against them. The concept states that these two aspects are always equal to each other. This is known as double entry.

What is the accrual basis concept?

The effects of transactions and other events are recognized when they occur and they are recorded in the books and reported in the financial statements of the period to which they relate. The key to the application of the concept is that all income and charges relating to the financial period to which the financial statements relate should be taken into account without regard to the date of receipt or payment.

When should the going concern concept be rejected?

- If the business is going to close down in the near future
- Where shortage of cash makes it almost certain that the business will have to cease trading
- Where a large part of the business will almost certainly have to be closed down because of shortage of cash

What are the attributes that make the information provided in financial statements useful to users?

1. Understandability
2. Relevance
3. Reliability
4. Comparability

When is information material?

Information is material if its omission or misstatement could influence the economic decision of users.

When is information reliable?

To be reliable, information must be free from material error and bias and able to be depended upon by users to represent faithfully what it claims to represent.

What is substance over form?

Transactions and other events must be accounted for and presented in accordance with their substance and economic reality and not merely their legal form.

What is the realisation concept?

The realisation concept holds to the view that profit and gains can only be taken into account when realisation has occurred and that realisation only occurs when the ultimate cash realised is capable of being assessed (i.e. determined) with reasonable certainty.

Which criteria needs to be observed before realisation can occur?

- Goods or services are provided to the buyer
- The buyer accepts liability to pay for the goods or services
- The monetary value of the goods or services has been established
- The buyer will be in a situation to be able to pay for the goods or services
 
Thus, this is only when you can be reasonably certain as to how much will be received that you can recognise profit or gains.

What is separate determination?

In determining the aggregate amount of each asset or liability, the amount of each individual asset or liability should be determined separately from all other assets and liabilities.

The question on the page originate from the summary of the following study material:

Accskills 1

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