Session 01 Accounting Concepts

Questions and Answers

What is the profit recognized by XY PLC during the month of January 2023?

Rs 55,000

Rs 25,000

Rs 30,000 (correct)

Rs 5,000

Which component is NOT considered an expense for XY PLC in January 2023?

Cost of stocks sold

Salaries

Sales commission

Office rental payment (correct)

How much revenue was generated from cash sales during January 2023?

Rs 160,000 (correct)

Rs 180,000

Rs 120,000

Rs 240,000

How does the matching concept influence the accounting for XY PLC?

It ensures that all costs are incurred at the same time as revenue. Signup and view all the answers

What percentage of commission is the sales staff entitled to on their sales?

5% Signup and view all the answers

Which of the following accurately describes the prudence concept in accounting?

Revenue should not be overstated and expenses should not be understated. Signup and view all the answers

What was the total value of credit sales before adjusting for unsold stock in January 2023?

Rs 240,000 Signup and view all the answers

What amount is owed for salaries at the end of January 2023 that will be paid next month?

Rs 80,000 Signup and view all the answers

What does the business entity concept imply in accounting?

Financial records should reflect personal transactions separately from business transactions. Signup and view all the answers

What is the significance of the money measurement concept?

It states that only transactions quantifiable in monetary terms are recorded. Signup and view all the answers

Which concept dictates that financial statements are prepared for specific periods?

Accounting period concept Signup and view all the answers

What does the going concern concept allow accountants to assume about a business?

The business will operate indefinitely without threats of closure. Signup and view all the answers

Which concept states that revenue must be recognized when earned, regardless of cash flow?

Accrual concept Signup and view all the answers

How does the matching concept guide financial reporting?

Expenses should be matched with the revenues they help to generate within the same period. Signup and view all the answers

What does the prudence concept emphasize in financial accounting?

Income should be recognized when probable, while expenses are recorded when possible. Signup and view all the answers

What role do accounting concepts play in financial reporting?

They aid in creating a basis for interpreting financial data. Signup and view all the answers

How are liabilities classified in a business organization?

Current liabilities and non-current liabilities Signup and view all the answers

At what point is revenue from the sale of goods considered realized?

Upon delivery of the goods sold Signup and view all the answers

What is the main focus of the realization concept in accounting?

Recognizing income only when it is realized Signup and view all the answers

Which situation could challenge the going concern assumption in a business?

Significant decrease in sales volume Signup and view all the answers

When can revenue from services be recognized as realized?

Upon completion of the service provided Signup and view all the answers

What should the inventory be valued at when its market value is lower than its cost?

Net realizable value of the inventory Signup and view all the answers

If a company delivers stocks worth Rs 550,000 but only receives Rs 300,000 in cash before the year-end, how much revenue is recognized based on the realization concept?

Rs 550,000 Signup and view all the answers

When a provision for doubtful receivables is made, what is the primary reason for this action?

To reduce the risk of financial loss Signup and view all the answers

Which of the following is NOT typically included in the classification of liabilities?

Equity liabilities Signup and view all the answers

If the cost of the inventory is Rs 560,000 and the net realizable value is Rs 500,000, what loss is recognized?

Rs 60,000 Signup and view all the answers

What happens to revenue recognition if cash is not received immediately upon the delivery of goods?

Revenue is still recognized based on delivery Signup and view all the answers

What amount should be recognized for accounts receivable if a provision for doubtful receivables of Rs 10,000 is made from Rs 220,000?

Rs 210,000 Signup and view all the answers

According to the prudence concept, what should be done if a non-current asset has been impaired?

Recognize the impairment loss Signup and view all the answers

What is the recoverable amount of a non-current asset?

The maximum amount expected from its use or sale Signup and view all the answers

What happens if the net realizable value of inventory is greater than its cost?

The inventory is recorded at cost Signup and view all the answers

How should the value of a machine with a cost of Rs 750,000 and accumulated depreciation of Rs 150,000 be treated if found impaired?

It should be written down to its recoverable amount Signup and view all the answers

Which revenue should be recognized by AB PLC for the stocks sold for cash in March 2023?

Rs.400,000 in April 2023 Signup and view all the answers

What amount should AB PLC recognize as revenue for the stocks sold on credit in April 2023?

Rs.250,000 Signup and view all the answers

According to the accrual concept, when is income recognized?

When it becomes due Signup and view all the answers

What is the revenue recognition status of the advance payment of Rs.300,000 received for stocks not yet supplied?

Recognized when stocks are supplied Signup and view all the answers

What amount of rent expense will be recognized if the monthly rent is Rs.15,000 and it has not been paid?

Rs.15,000 Signup and view all the answers

In which month will the Rs.400,000 from stocks sold in March be recorded as revenue?

April 2023 Signup and view all the answers

What is the implication of the accrual concept for the receipt of an electricity bill of Rs.10,000?

Expense recognized when incurred Signup and view all the answers

What total revenue should AB PLC recognize for April 2023 considering all transactions?

Rs.650,000 Signup and view all the answers

Study Notes

Accounting Concepts Overview

Accounting concepts form the theoretical foundation for financial accounting.
They ensure consistency and uniformity in recording financial transactions and presenting results in financial statements.
Essential concepts include: Business Entity, Money Measurement, Accounting Period, Going Concern, Realization, Accrual, Matching, and Prudence.

Business Entity Concept

The business and its owners are treated as separate legal entities.
Business transactions are recorded independently from personal transactions of owners.
Owner's investment in the business is classified as "capital" or "equity".

Money Measurement Concept

Only transactions that can be quantified in monetary terms are recorded in financial statements.
This promotes objectivity and comparability in financial reporting.

Accounting Period Concept

Financial statements are prepared for specific periods to provide timely information.
This aids users in assessing performance and making economic decisions.

Going Concern Concept

Assumes that the business will continue its operations indefinitely.
Any indication of potential business closure raises questions about asset valuations in financial reporting.

Realization Concept

Income is recognized only when it's realized, meaning when the right to receive payment is established.
Example: Revenue from goods is realized upon delivery, not when cash is received.

Accrual Concept

Income and expenses are recognized when they incur, regardless of cash flow.
Ensures financial statements reflect true financial position and performance.

Matching Concept

Requires that expenses be matched with the revenues they help generate in the same period.
This provides a more accurate representation of profit or loss.

Prudence Concept

Promotes caution in financial reporting to avoid overstatement of income or understatement of expenses.
Key applications include:
- Valuing inventory at the lower of cost and net realizable value.
- Creating provisions for doubtful receivables to reflect true collectability.
- Recognizing impairments to non-current asset values, ensuring they are not overstated.

Review and Learning Outcomes

Understanding these concepts is crucial for proper financial reporting and analysis.
Knowledge of the concepts enhances decision-making capabilities for stakeholders using financial statements.

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Description

Explore the fundamental accounting concepts that form the backbone of financial accounting in this engaging quiz. Topics covered include the business entity concept, money measurement, and the accrual concept among others. Test your knowledge and understanding of how these principles apply to real-world scenarios.