Accounting concepts and Convention
Instruction: Match the following terms numbered 1 - 8 with the appropriate definition
lettered A-G.
1. Historical
Cost Concept
2. Business
Entity
3. Duality Concept
4. Accrual
concept
5. Going Concept
6. Materiality
7. Prudence
8. Consistency
A
4
Events and transaction are recognized when they occur and recorded
in the business book and reported in the financial statement for the
period in which they relate.
B
2
C
1
The affairs of the business are treated separate from the affairs of the
owner of the business.
The valuation of the business assets is normally at cost price
D
7
The accountant when recording transactions must ensure that gains
and losses are not overstated or understated.
E
8
Applying the same methods each year for greater comparability
F
3
There are two aspects of accounting, one represents the assets owned
by the business and the other the claims of others against these assets.
G
5
The business will continue to operate for a long period of time and
will not close its operations in the near future.
Indicate the accounting concept that is being violated in the following cases:
•
•
•
•
•
•
Step by Step company used one method to count its stock in 2005, another in 2006
and still another in 2007. Consistency
Step by Step company only recognized cash sales made and ignores credit sales.
Accruals/matching concept
Step by Step company’s owners include a very expensive motor vehicle owned by
them in the balance sheet. Business Entity
Step by Step company is planning to expand its premises by spending from a big
profit to be made from next month’s sale. Prudence
Step by Step company borrowed money last year to increase its sales but only
recorded interest expense last year. The loan will continue for another two years.
Accruals
Step by Step company collected a cheque from the sale of a machine, but only
recorded the cheque received. Dual Aspects