Question

QUESTION 13 a). Briefly explain the following: i Prudence concept (2 marks) ii. iii. Going Concen concept (2 marks) Accrual concept (2 marks) 1V. iv. Consistency concept (2 marks) v. ateriality concept (2 marks b). Write short notes on the following with two examples of each i)Capital expenditure (3 marks) ii)Revenue expenditure (3 marks)

QUESTION 13 a). Briefly explain the following: i Prudence concept (2 marks) ii. iii. Going Concen concept (2 marks) Accrual concept (2 marks) 1V. iv. Consistency concept (2 marks) v. ateriality concept (2 marks b). Write short notes on the following with two examples of each i)Capital expenditure (3 marks) ii)Revenue expenditure (3 marks)

Answer 1

Answer 13

(a) (i) Under the prudence concept, do not overestimate the amount of revenues recognized or underestimate the amount of expenses. You should also be conservative in recording the amount of assets, and not underestimate liabilities. The result should be conservatively-stated financial statements.

(ii) Going concern is a basic underlying assumption that a company or other entity will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on.

(iii) Accrual concept is the most fundamental principle of accounting which requires recording revenues when they are earned and not when they are received in cash, and recording expenses when they are incurred and not when they are paid.

(iv) The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods. Only change an accounting principle or method if the new version in some way improves reported financial results.

(v) The materiality concept is the principle in financial accounting and reporting that firms may disregard trivial matters, but they must disclose everything that is important to the report audience. Items that are important enough to matter are material items.

(b) (i) A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset.

(ii) A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense. Even significant repairs that do not extend the life of the asset or do not improve the asset (the repairs merely return the asset back to its previous condition) are revenue expenditures.