Accounting concepts used in the preparation of accounting records flashcards

Topic 5: Accounting concepts used in the preparation of accounting records

Money measurement: why is a loyal customer base not shown as an asset?

Only items with a reliable money value are recorded, and a customer base has none.

Duality and cost concepts

Duality: every transaction has two equal effects, so debits = credits. Cost: assets are recorded at what they cost, not market value.

A business will close in two months. Which concept no longer applies, and how are assets valued?

Going concern. Assets are valued at what they are expected to realise (break-up values).

An order is placed in May; the goods are delivered and accepted in June. When is revenue recognised?

June, when the goods are accepted. Realisation concept.

A £20 calculator is charged to office expenses, not equipment. Which concept allows this?

Materiality: immaterial items need not be treated strictly.

A customer owing £900 has gone into liquidation. Which concept requires action now, and what action?

Prudence: write the debt off as irrecoverable, recognising the loss now.

An item cost £60. It can be sold for £75 after £20 of repairs. Inventory value?

NRV = 75 − 20 = £55, below cost, so £55. Compare cost and NRV item by item.

Goods at selling price £1,500 (mark-up 25% on cost) are on sale or return, not yet accepted, but recorded as sales. Profit overstated by?

Cost 1,500 ÷ 1.25 = £1,200. Profit overstated by £300. Reduce revenue and receivables by £1,500; add £1,200 to inventory.

The owner pays the business rent from a private account. Entry and concept?

Debit Rent, credit Capital. Business entity: the owner has put money into the business.

A trader changes depreciation method every year to keep profit steady. Which concept is breached?

Consistency: the same methods should be used each period so profits are comparable.

Is a £400 delivery charge on a new machine capital or revenue expenditure?

Capital (cost concept): it is part of getting the asset ready for use. Insurance and fuel are revenue.

Prudence vs materiality

Prudence is about not overstating assets or profit. Materiality is about whether an item matters enough to need strict treatment.