Podcast
Questions and Answers
A business owner uses company funds to pay for their child's tuition. Which accounting concept is violated by this action?
A business owner uses company funds to pay for their child's tuition. Which accounting concept is violated by this action?
- Accrual Concept
- Entity Concept (correct)
- Going Concern Concept
- Materiality Concept
A company's brand reputation significantly boosts sales, but this value is not recorded on the balance sheet. Which accounting concept explains this?
A company's brand reputation significantly boosts sales, but this value is not recorded on the balance sheet. Which accounting concept explains this?
- Full Disclosure Concept
- Realisation Concept
- Cost Concept
- Money Measurement Concept (correct)
A company is experiencing financial difficulties but continues to depreciate its assets based on their original cost. Which accounting concept justifies this practice?
A company is experiencing financial difficulties but continues to depreciate its assets based on their original cost. Which accounting concept justifies this practice?
- Materiality Concept
- Cost Concept
- Prudence / Conservatism Concept
- Going Concern Concept (correct)
A company purchased land for $200,000. Several years later, its market value is $350,000. On the balance sheet, the land is still recorded at $200,000. Which accounting concept is being followed?
A company purchased land for $200,000. Several years later, its market value is $350,000. On the balance sheet, the land is still recorded at $200,000. Which accounting concept is being followed?
A business delivers goods to a customer in June but receives payment in July. In which month should the business record the revenue, according to the Realisation Concept?
A business delivers goods to a customer in June but receives payment in July. In which month should the business record the revenue, according to the Realisation Concept?
A company receives an electricity bill in December but pays it in January. According to the Accrual Concept, in which period should the expense be recorded?
A company receives an electricity bill in December but pays it in January. According to the Accrual Concept, in which period should the expense be recorded?
A company switches from the FIFO (First-In, First-Out) method to the LIFO (Last-In, First-Out) method for inventory valuation without disclosing the change. Which accounting concept is violated?
A company switches from the FIFO (First-In, First-Out) method to the LIFO (Last-In, First-Out) method for inventory valuation without disclosing the change. Which accounting concept is violated?
A company anticipates a likely loss from a pending lawsuit and records a provision for it, even though the outcome is not yet certain. Which accounting concept is being applied?
A company anticipates a likely loss from a pending lawsuit and records a provision for it, even though the outcome is not yet certain. Which accounting concept is being applied?
A small office supply, costing $5, is immediately expensed rather than recorded as an asset and depreciated. Which accounting concept allows this treatment?
A small office supply, costing $5, is immediately expensed rather than recorded as an asset and depreciated. Which accounting concept allows this treatment?
A company has significant contingent liabilities from environmental claims. Where should this information be presented in the financial statements?
A company has significant contingent liabilities from environmental claims. Where should this information be presented in the financial statements?
Flashcards
Entity Concept
Entity Concept
A business is distinct from its owner; personal transactions are separate from business transactions.
Money Measurement Concept
Money Measurement Concept
Record only transactions measurable in monetary terms.
Going Concern Concept
Going Concern Concept
Assume the business will operate indefinitely; assets are recorded at cost, not liquidation value.
Cost Concept
Cost Concept
Assets are recorded at their purchase cost, not market value.
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Realization Concept
Realization Concept
Recognize revenue when it's earned, not just when cash is received.
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Accrual Concept
Accrual Concept
Record revenue and expenses when they occur, not when cash changes hands.
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Periodicity Concept
Periodicity Concept
Prepare financial statements for specific periods (monthly, quarterly, yearly) for regular reporting.
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Consistency Concept
Consistency Concept
Apply the same accounting methods consistently across time periods.
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Prudence / Conservatism Concept
Prudence / Conservatism Concept
Record profits when realized; anticipate and record potential losses.
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Materiality Concept
Materiality Concept
Record and disclose significant financial information that affects decision-making.
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- These are concepts that underpin accounting practices, ensuring accuracy, consistency, and transparency in financial reporting.
Entity Concept
- A business is a separate entity from its owner with distinct business transactions.
- The owner's personal transactions are not the same as the business's transactions.
- Owner's investment is recorded as capital, not personal income.
Money Measurement Concept
- Only record financial transactions measurable in monetary terms.
- Non-monetary factors like employee skills or brand reputation are not recorded.
- Employee skills are valuable, but not recorded in financial statements.
Going Concern Concept
- Assumes a business will operate indefinitely.
- Assets are recorded at cost, not liquidation value.
- A company does not record assets at their sale price unless liquidation is planned.
Cost Concept
- Assets are recorded at their purchase cost, not market value.
- Depreciation is applied over time, but the original cost remains the reference point.
- A building purchased for ₹10 lakh is recorded at ₹10 lakh, even if its market value increases to ₹15 lakh.
Realization Concept
- Revenue is recognized when earned, not necessarily when cash is received.
- If goods are sold on credit in December, revenue is recorded then, even if payment is received in January.
Accrual Concept
- Revenue and expenses are recorded when they occur, not when cash is received or paid.
- Record employee salaries for December in December, even if paid in January.
Periodicity Concept
- Financial statements are prepared for specific time periods (monthly, quarterly, yearly).
- Enables regular reporting and comparison.
- For example, businesses prepare annual financial statements from April 1 to March 31.
Consistency Concept
- Apply the same accounting methods consistently over time.
- Disclose changes with proper justification.
- A company using straight-line depreciation should not frequently switch to the declining balance method.
Prudence / Conservatism Concept
- Profits should not be recorded until realized. Anticipate potential losses.
- Ensures financial caution and prevents overstatement of income.
- Create a provision for doubtful debts if there is uncertainty about receiving a payment.
Materiality Concept
- Record and disclose only significant financial information that affects decisions.
- Small, insignificant expenses can be ignored for simplicity.
- A business directly expenses a ₹10 pencil instead of recording it as an asset.
Full Disclosure Concept
- Disclose all relevant financial information in financial statements.
- Notes to accounts should explain additional details.
- Disclose contingent liabilities (e.g., pending lawsuits) in financial statements, even if unconfirmed.
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