, FIN2603 Assignment 1 (COMPLETE ANSWERS) Semester
1 2026 - DUE 16 March 2026; 100% Correct solutions and
explanations.
Question 1
1. Accounting Entity
The accounting entity concept assumes that the business is a separate and distinct entity from its
owners or any other entities. All financial transactions recorded in the books of the business
relate solely to the business and not to the personal affairs of the owner. This ensures that the
financial statements accurately reflect the performance and position of the business itself. For
example, if the owner of a retail store buys a car for personal use, this transaction is not recorded
in the business’s accounting records because it does not pertain to the business.
2. Conservatism
The conservatism principle, also called prudence, requires accountants to be cautious when
reporting uncertain events. Potential losses should be recognized as soon as they are foreseeable,
while gains should only be recorded when they are certain. This prevents the overstatement of
profits or assets. For instance, if a company expects that some of its customers may not pay their
debts, it should record a provision for doubtful debts, even if the loss has not yet occurred.
3. Consistency Concept
The consistency concept requires a business to apply the same accounting methods and policies
from one accounting period to another. This allows for meaningful comparison of financial
statements over time. Any changes in methods must be disclosed and justified. For example, if a
company uses the straight-line method for depreciation in one year, it should continue to use the
same method in subsequent years to allow users to compare results accurately.
4. Historical Cost
The historical cost principle states that assets should be recorded at their original purchase price,
including all costs necessary to bring the asset to its intended use. This ensures objectivity and
verifiability since the recorded amount is factual and not based on estimated market values. For
example, if a company buys machinery for $50,000, it records it at $50,000 even if the market
value increases over time.
5. Going-Concern Concept
The going-concern concept assumes that a business will continue to operate for the foreseeable
future and will not be forced to liquidate. This assumption allows financial statements to be
prepared under the understanding that assets will be used and liabilities settled in the normal
course of business. For example, long-term loans are recorded as liabilities because the business
is expected to repay them over time, rather than immediately.
6. Realisation Principle
The realization principle, or revenue recognition principle, states that revenue should be
recognized when it is earned, regardless of when cash is received. This ensures that income is
1 2026 - DUE 16 March 2026; 100% Correct solutions and
explanations.
Question 1
1. Accounting Entity
The accounting entity concept assumes that the business is a separate and distinct entity from its
owners or any other entities. All financial transactions recorded in the books of the business
relate solely to the business and not to the personal affairs of the owner. This ensures that the
financial statements accurately reflect the performance and position of the business itself. For
example, if the owner of a retail store buys a car for personal use, this transaction is not recorded
in the business’s accounting records because it does not pertain to the business.
2. Conservatism
The conservatism principle, also called prudence, requires accountants to be cautious when
reporting uncertain events. Potential losses should be recognized as soon as they are foreseeable,
while gains should only be recorded when they are certain. This prevents the overstatement of
profits or assets. For instance, if a company expects that some of its customers may not pay their
debts, it should record a provision for doubtful debts, even if the loss has not yet occurred.
3. Consistency Concept
The consistency concept requires a business to apply the same accounting methods and policies
from one accounting period to another. This allows for meaningful comparison of financial
statements over time. Any changes in methods must be disclosed and justified. For example, if a
company uses the straight-line method for depreciation in one year, it should continue to use the
same method in subsequent years to allow users to compare results accurately.
4. Historical Cost
The historical cost principle states that assets should be recorded at their original purchase price,
including all costs necessary to bring the asset to its intended use. This ensures objectivity and
verifiability since the recorded amount is factual and not based on estimated market values. For
example, if a company buys machinery for $50,000, it records it at $50,000 even if the market
value increases over time.
5. Going-Concern Concept
The going-concern concept assumes that a business will continue to operate for the foreseeable
future and will not be forced to liquidate. This assumption allows financial statements to be
prepared under the understanding that assets will be used and liabilities settled in the normal
course of business. For example, long-term loans are recorded as liabilities because the business
is expected to repay them over time, rather than immediately.
6. Realisation Principle
The realization principle, or revenue recognition principle, states that revenue should be
recognized when it is earned, regardless of when cash is received. This ensures that income is
