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Questions and Answers
What is the primary purpose of the Accounting Period Concept?
Which accounting concept assumes that a business will continue to operate indefinitely in the near future?
What is the primary difference between the Cash Basis and Accrual Basis of Accounting?
Which accounting concept ensures that all expenses incurred during a period are matched with the revenue earned during that period?
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What is the main advantage of the Consistency Concept?
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Which accounting concept does not take into account inflation?
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What is the underlying assumption of the Going Concern Concept?
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Which accounting concept is responsible for ensuring that financial information is comparable between two accounting periods?
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What is the primary purpose of the Matching Concept?
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What is the main advantage of the Accrual Basis of Accounting?
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Which accounting concept is responsible for dividing the life of the business into arbitrary time periods?
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What is the primary disadvantage of the Cash Basis of Accounting?
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What is the main similarity between the Historical Cost Concept and the Cash Basis of Accounting?
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Which accounting concept is responsible for ensuring that financial information is relevant and reliable?
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Study Notes
Accounting Concepts
- Consistency Concept ensures consistency in accounting procedures between accounting periods, allowing for fair comparison of financial information.
Accounting Period
- The life of a business is divided into arbitrary time periods (e.g. quarterly, mid-year, annually) to ascertain profits.
Going Concern Concept
- This concept assumes a business will operate indefinitely in the near future, unless it is on the verge of liquidation.
Historical Cost Concept
- Assets are recorded at their original cost, without considering inflation.
Cash Basis of Accounting
- Income is reported when received, not when invoiced to a client.
- Expenses are reported when paid, not when the bill is received.
Accrual Basis Accounting
- Income is reported when earned, not necessarily when received.
- Expenses are reported when incurred, not necessarily when paid.
Matching Concept
- All expenses incurred during a period must be matched with revenue earned during that period to determine a correct profit.
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Description
Understand the fundamental concepts in accounting, including consistency, accounting period, and going concern. Learn how these concepts ensure reliable financial information and facilitate comparison across periods.
