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Questions and Answers
What does the Business Entity Concept state?
What does the Business Entity Concept state?
- The business and personal transactions of owners are combined.
- The business and its owners are considered separate legal entities. (correct)
- All assets of the business belong to the owners personally.
- The business should only record transactions in cash.
Which accounting concept assumes that a business will continue to operate indefinitely?
Which accounting concept assumes that a business will continue to operate indefinitely?
- Dual Aspect Concept
- Going Concern Concept (correct)
- Materiality Concept
- Conservatism Concept
What is the focus of the Money Measurement Concept in accounting?
What is the focus of the Money Measurement Concept in accounting?
- Only transactions that can be measured in monetary terms are recorded. (correct)
- All transactions must be recorded at historical cost.
- It prohibits recording intangible assets in the financial statements.
- Businesses must report profits in monetary and non-monetary terms.
Which of the following accounting conventions relates to recognizing expenses as soon as they are anticipated?
Which of the following accounting conventions relates to recognizing expenses as soon as they are anticipated?
The Dual Aspect Concept reflects which of the following accounting principles?
The Dual Aspect Concept reflects which of the following accounting principles?
Which of the following is NOT a main accounting concept?
Which of the following is NOT a main accounting concept?
Why are Generally Accepted Accounting Principles (GAAP) important in accounting?
Why are Generally Accepted Accounting Principles (GAAP) important in accounting?
What is the significance of the Consistency Convention in accounting?
What is the significance of the Consistency Convention in accounting?
What are the two aspects to be recorded when goods are purchased for cash?
What are the two aspects to be recorded when goods are purchased for cash?
Which equation expresses the fundamental accounting principle related to the dual aspect concept?
Which equation expresses the fundamental accounting principle related to the dual aspect concept?
How does the dual aspect concept aid in accounting?
How does the dual aspect concept aid in accounting?
When capital is brought in by the owner, what are the two aspects involved?
When capital is brought in by the owner, what are the two aspects involved?
Which transaction reflects a decrease in bank balance as one of its aspects?
Which transaction reflects a decrease in bank balance as one of its aspects?
What results from the dual aspect concept for every transaction conducted by a business?
What results from the dual aspect concept for every transaction conducted by a business?
What is the impact on assets and liabilities when rent is paid in cash?
What is the impact on assets and liabilities when rent is paid in cash?
Which of the following statements accurately describes the dual aspect of a cash sale?
Which of the following statements accurately describes the dual aspect of a cash sale?
What is the main purpose of the Convention of Consistency in financial statements?
What is the main purpose of the Convention of Consistency in financial statements?
What should happen when there is a change in the method of accounting?
What should happen when there is a change in the method of accounting?
Which of the following methods can be used for charging depreciation on fixed assets?
Which of the following methods can be used for charging depreciation on fixed assets?
How should unsold stock typically be valued according to the Convention of Consistency?
How should unsold stock typically be valued according to the Convention of Consistency?
Why are precious metals like gold and diamonds generally valued at market price?
Why are precious metals like gold and diamonds generally valued at market price?
What is a consequence of using inconsistent accounting methods over time?
What is a consequence of using inconsistent accounting methods over time?
Which of the following best describes the principle of consistency in accounting?
Which of the following best describes the principle of consistency in accounting?
What should a businessman primarily ensure for effective analysis of financial statements?
What should a businessman primarily ensure for effective analysis of financial statements?
What is the primary purpose of the convention of materiality?
What is the primary purpose of the convention of materiality?
What does the convention of conservatism primarily guide in accounting?
What does the convention of conservatism primarily guide in accounting?
In which situation is the convention of conservatism considered particularly useful?
In which situation is the convention of conservatism considered particularly useful?
How does the convention of conservatism affect profit reporting?
How does the convention of conservatism affect profit reporting?
What should be done with unsold stock at the end of the year according to financial conventions?
What should be done with unsold stock at the end of the year according to financial conventions?
What is a potential result of overstating profits according to the convention of conservatism?
What is a potential result of overstating profits according to the convention of conservatism?
Which of the following statements aligns with the convention of conservatism?
Which of the following statements aligns with the convention of conservatism?
What is a key feature of the convention of materiality?
What is a key feature of the convention of materiality?
According to the going concern concept, how is a business perceived in terms of its lifespan?
According to the going concern concept, how is a business perceived in terms of its lifespan?
Valuation of stock at the lower of cost or net realizable value exemplifies which accounting convention?
Valuation of stock at the lower of cost or net realizable value exemplifies which accounting convention?
Which concept states that both aspects of a transaction must be recorded?
Which concept states that both aspects of a transaction must be recorded?
Under which accounting concept is the owner of a business regarded as a creditor for the amount of his capital?
Under which accounting concept is the owner of a business regarded as a creditor for the amount of his capital?
If a businessman anticipates that $5,000 may not be collected from a debtor, how should this transaction be recorded?
If a businessman anticipates that $5,000 may not be collected from a debtor, how should this transaction be recorded?
What is the appropriate recording price for unsold stock if its cost price is $20,000 and market price is $25,000?
What is the appropriate recording price for unsold stock if its cost price is $20,000 and market price is $25,000?
How should the unsold stock be recorded if the cost price is $21,000 while the market price remains $25,000?
How should the unsold stock be recorded if the cost price is $21,000 while the market price remains $25,000?
Which accounting convention primarily focuses on recognizing expenses when they occur rather than when cash is paid?
Which accounting convention primarily focuses on recognizing expenses when they occur rather than when cash is paid?
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Study Notes
Accounting Concepts
- Business Entity Concept: The business and the owner are separate entities.
- Money Measurement Concept: Transactions are recorded in monetary terms (currency).
- Going Concern Concept: The business is assumed to continue operating indefinitely.
- Dual Aspect Concept: Every transaction affects at least two accounts, with a corresponding increase and decrease in the accounting equation.
Accounting Conventions
- Convention of Materiality: Only significant and important items need be disclosed to users.
- Convention of Conservatism: "Anticipate no profit, but provide for all possible losses." This means recording possible losses but not recording potential profits until they are realized.
- Convention of Consistency: The same accounting methods should be followed from year to year to allow for comparisons in financial statements.
Dual Aspect Concept in Practice
- This concept is represented by the fundamental accounting equation: Assets = Liabilities + Capital
- Examples of transactions:
- Capital brought in by the owner: Increased capital (owner's equity), increased cash (assets).
- Purchase of machinery by cheque: Decreased bank balance (assets), increased machinery (assets).
- Goods sold for cash: Increased cash (assets), decreased inventory (assets).
- Rent paid in cash: Increased expense (rent), decreased cash (assets).
Convention of Consistency: Significance
- Consistent practices: Allow for meaningful comparisons of financial statements over time.
- Uniform accounting methods: Help analyze business performance and trends.
- Changes in methods must be disclosed in financial statements.
Convention of Materiality: Significance
- Meaningful financial reporting: Focuses on important aspects of business performance.
- Insignificant items: May be disclosed in footnotes or other supporting information.
Convention of Conservatism: Significance
- **Aimed at: ** Showing a minimum, rather than maximum, profit.
- Prevents: Overstating profits and distributing dividends from capital.
- Guides: Recording transactions in a prudent manner, anticipating potential losses and not overestimating potential profits.
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