Accounting Accruals Principles
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Questions and Answers

Which of the following qualitative characteristics of accounting information ensures that users can compare the financial statements of different entities?

  • Verifiability
  • Understandability
  • Comparability (correct)
  • Timeliness

    • What is the overriding consideration in achieving a balance between timeliness and fundamental characteristics of relevance and faithful representation?

  • To minimize the cost of reporting
  • To satisfy the economic decision-making needs of the users (correct)
  • To ensure accuracy in financial reporting
  • To maximize the speed of reporting

    • Which of the following qualitative characteristics of accounting information ensures that financial information is free from error and bias?

  • Timeliness
  • Neutrality (correct)
  • Verifiability
  • Comparability

    • What is the primary purpose of verifiability in accounting information?

    <p>To provide assurance to users regarding the credibility and reliability of financial information</p> Signup and view all the answers

    Which of the following qualitative characteristics of accounting information ensures that financial information is presented in a way that is easy to understand by users?

    <p>Understandability</p> Signup and view all the answers

    What is the primary purpose of comparability in accounting information?

    <p>To facilitate comparison of financial statements across different entities and over time</p> Signup and view all the answers

    Which of the following qualitative characteristics of accounting information is most closely related to the concept of completeness?

    <p>Completeness</p> Signup and view all the answers

    What is the trade-off in achieving timeliness in financial reporting?

    <p>Between timeliness and faithful representation</p> Signup and view all the answers

    What is the primary assumption made by an accountant when preparing financial statements?

    <p>The business will continue to operate for the foreseeable future</p> Signup and view all the answers

    Which of the following is an example of the going concern assumption?

    <p>Recording an asset at its net book value after depreciation</p> Signup and view all the answers

    What is the situation where the going concern assumption should be rejected?

    <p>If the business is going to close down in the near future</p> Signup and view all the answers

    What is the fundamental qualitative characteristic of financial statements that ensures that the information presented is faithful and accurate?

    <p>Verifiability</p> Signup and view all the answers

    Which of the following accounting principles states that the financial statements should be presented in a way that is consistent with the substance of the transactions rather than their legal form?

    <p>Substance over form</p> Signup and view all the answers

    What is the accounting principle that states that the financial statements should be prepared on the assumption that the business will continue to operate for the foreseeable future?

    <p>Going concern assumption</p> Signup and view all the answers

    Which of the following is an example of the accruals basis accounting principle?

    <p>Recording revenue when it is earned, regardless of when it is received</p> Signup and view all the answers

    What is the main principle of accrual accounting?

    <p>Revenue is recognized when earned, regardless of when cash is received</p> Signup and view all the answers

    What is the fundamental qualitative characteristic of financial statements that ensures that the information presented is relevant and useful to users?

    <p>Relevance</p> Signup and view all the answers

    What is the purpose of matching principle in accrual accounting?

    <p>To match revenue with expenses incurred during the same period</p> Signup and view all the answers

    What is the principle of consistency in accounting?

    <p>A business should be consistent in its accounting treatment from one period to another</p> Signup and view all the answers

    What disclosure is required when a company changes its accounting principle?

    <p>The nature of the change, reasons for the change, effect on current net income, and cumulative effect on past income</p> Signup and view all the answers

    What is the main principle of double entry accounting?

    <p>Every financial transaction affects the entity in two ways</p> Signup and view all the answers

    What is the purpose of accrual accounting in financial statements?

    <p>To show revenue earned and expenses incurred during a period</p> Signup and view all the answers

    What is the result of not following the consistency principle in accounting?

    <p>Invalid comparisons can be made between periods</p> Signup and view all the answers

    What is the benefit of using accrual accounting in financial statements?

    <p>It provides a more accurate picture of financial performance</p> Signup and view all the answers

    Study Notes

    Accruals

    • Income is recognized in the financial statement as it is earned, not when cash is received.
    • Expenditure is recognized as it is incurred, not when it is paid for.
    • Revenue earned during an accounting period is matched with the expenses associated with earning that revenue.

    Accounting Principles

    • Consistency is essential in accounting, where similar items within a single set of accounts should be given similar accounting treatment.
    • Consistency also applies from one period to the next in accounting for similar items.
    • A business can change its accounting method, but it must be done with valid reasons and disclosed in the financial statements.
    • Disclosure requirements include:
      • Nature of the change
      • Reasons for the change
      • Effect of the change on current net income, if significant
      • Cumulative effect of the change on past income

    Double Entry (Duality)

    • Every financial transaction affects the entity in two ways, giving rise to two accounting entries, one a debit and the other a credit.

    Fundamental Qualitative Characteristics

    • Relevance
    • Faithful representation

    Enhancing Qualitative Characteristics

    • Comparability
    • Verifiability
    • Timeliness
    • Understandability
    • Materiality
    • Substance over form
    • Going concern
    • Business entity
    • Accruals basis
    • Prudence

    Going Concern Assumption

    • The business will continue to operate for the foreseeable future, and there is neither the intention nor the necessity to put the company into liquidation.
    • Assets are carried at their original cost, rather than their current liquidation values.
    • Examples:
      • Asset purchased for $50,000, expected to last for 5 years, with depreciation cost of $10,000 per annum.
      • Going concern assumption is rejected when the business is going to close down in the near future or where there is a shortage of cash.

    Qualitative Accounting Characteristics

    • Completeness: all necessary information must be included.
    • Neutrality: objective and without bias, financial information not manipulated in any way.
    • Freedom from error: no errors or omissions made in producing financial information.

    Comparability

    • Users must be able to compare the financial statements/information over time and across different entities.
    • Comparability is achieved through a combination of consistency and disclosure.

    Verifiability

    • Means that a number of users would broadly agree that faithful representation of financial information has been achieved.
    • Verifiability provides assurance to users regarding its credibility and reliability.

    Timeliness

    • Information may become less useful if there is a delay in reporting it.
    • There is a trade-off between timeliness and fundamental characteristics of relevance and faithful representation.

    Understandability

    • Financial information needs to be capable of being understood by users having a reasonable knowledge of business and economic activities and accounting.

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    Description

    Learn about accruals in accounting, including when to recognize income and expenses, and how to match revenue with associated expenses.

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