Accounting principles and concepts
fully solved 2023
The going concern concept - answer Financial statements are prepared on the assumption that
the business will continue its operations for the foreseeable future; i.e. there is no need to sell
off non-current assets
The accruals concept - answer Profit is the excess of revenue over expenses, not the excess of
cash received over cash paid. Income and expenditure are recognised in the accounting period
to which they relate, not the period in which cash is received or paid
The prudence concept - answer Caution should be exercised when making accounting
judgements. Assets and profits are only recorded when they are certain; liabilities and expenses
are recorded when they are probable.
The materiality concept - answer Financial information is important and must be included in the
accounts if it would sway the opinion of the person reading it.
The historic cost convention (UK GAAP) - answer The value of assets shown on the statement of
financial position should be based on their acquisition cost.
Substance over form - answer The economic substance of transactions and events must be
recorded in the financial statements rather than just their legal form in order to present a true
and fair view of the affairs of the entity.
The consistency concept - answer If a particular method of accounting is used to deal with a
transaction, it should be applied consistently over time
The business entity concept - answer The transactions associated with a business must be
separately recorded from those of its owners or other businesses
fully solved 2023
The going concern concept - answer Financial statements are prepared on the assumption that
the business will continue its operations for the foreseeable future; i.e. there is no need to sell
off non-current assets
The accruals concept - answer Profit is the excess of revenue over expenses, not the excess of
cash received over cash paid. Income and expenditure are recognised in the accounting period
to which they relate, not the period in which cash is received or paid
The prudence concept - answer Caution should be exercised when making accounting
judgements. Assets and profits are only recorded when they are certain; liabilities and expenses
are recorded when they are probable.
The materiality concept - answer Financial information is important and must be included in the
accounts if it would sway the opinion of the person reading it.
The historic cost convention (UK GAAP) - answer The value of assets shown on the statement of
financial position should be based on their acquisition cost.
Substance over form - answer The economic substance of transactions and events must be
recorded in the financial statements rather than just their legal form in order to present a true
and fair view of the affairs of the entity.
The consistency concept - answer If a particular method of accounting is used to deal with a
transaction, it should be applied consistently over time
The business entity concept - answer The transactions associated with a business must be
separately recorded from those of its owners or other businesses
