Accounting Concepts

What is the concept of Materiality in accounting?

• The importance of an item in financial statements

• The physical presence of assets

• The legal ownership of assets

• The historical cost of an asset

Answer explanation

Materiality in accounting refers to the significance of an item in financial statements. It determines whether an omission or misstatement could influence the economic decisions of users, making the correct choice about its importance.

What is the Entity (Business Entity) concept in accounting?

• A principle that separates the business transactions from the personal transactions of the owners

• A method of calculating depreciation

• A type of financial statement

• A tax regulation for businesses

Answer explanation

The Entity concept in accounting is a principle that ensures business transactions are recorded separately from the personal transactions of the owners, maintaining clear financial boundaries.

The Money Measurement concept in accounting states that only transactions and events that can be measured in terms of money are recorded in the books of accounts. Which of the following best describes this concept?

• Only monetary transactions are recorded in accounting books.

• All business events, whether monetary or not, are recorded.

• Non-monetary transactions are prioritized in accounting.

• Future transactions are recorded in advance.

Answer explanation

The Money Measurement concept states that only transactions measurable in monetary terms are recorded. Therefore, the correct choice is that only monetary transactions are recorded in accounting books.

The Going Concern concept in accounting implies that a business:

• Will continue to operate indefinitely

• Is likely to be sold soon

• Is facing immediate liquidation

• Has a fixed lifespan

Answer explanation

The Going Concern concept assumes that a business will continue to operate indefinitely, meaning it is not expected to liquidate or be sold soon. This principle is fundamental in accounting for assessing a company's financial health.

What is the Cost concept in accounting?

• The principle that assets should be recorded at their original cost.

• The idea that expenses should be matched with revenues.

• The concept that financial statements should be prepared with caution.

• The notion that all transactions should be recorded in monetary terms.

Answer explanation

The Cost concept in accounting states that assets should be recorded at their original cost, ensuring consistency and reliability in financial reporting.

What is the principle of consistency in accounting?

• A method of ensuring financial statements are comparable over time by using the same accounting methods.

• A principle that requires financial statements to be prepared with accuracy and precision.

• A guideline that mandates the disclosure of all financial information to stakeholders.

• A rule that requires the use of the most conservative accounting methods available.

Answer explanation

The principle of consistency in accounting ensures that financial statements are comparable over time by using the same accounting methods. This allows stakeholders to analyze trends and make informed decisions.

When are business transactions recorded in the final accounts according to the realisation concept?

• When the transaction is initiated

• When the transaction is completed

• When cash is received

• When the transaction is legally enforceable

Answer explanation

According to the realisation concept, business transactions are recorded in the final accounts when the transaction is completed, as this reflects the actual transfer of goods or services.

The accruals concept in accounting ensures:

• Revenues and expenses are recorded when they are incurred, regardless of when cash is exchanged.

• Transactions are recorded only when cash is received or paid.

• Assets are recorded at their historical cost.

• Financial statements are prepared only once a year.

Answer explanation

The accruals concept in accounting states that revenues and expenses are recognized when they are incurred, not when cash is exchanged. This ensures a more accurate representation of a company's financial position.

Which of the following is an example of the prudence concept in accounting?

• Overstating profits

• Making a provision for depreciation

• Ignoring liabilities

• Valuing inventory at the highest possible cost

Answer explanation

The prudence concept in accounting advises caution in financial reporting. Making a provision for depreciation reflects this by recognizing potential losses, ensuring profits are not overstated.

What is the duality concept in accounting?

• It refers to the principle that every financial transaction has equal and opposite effects in at least two different accounts.

• It is the idea that assets should always equal liabilities plus equity.

• It is the concept that revenue should be recognized when earned, regardless of when received.

• It refers to the method of recording transactions at their historical cost.

Answer explanation

The duality concept in accounting states that every financial transaction affects at least two accounts with equal and opposite effects, ensuring the accounting equation remains balanced.