Theory Base of Accounting

The correct basic accounting concept is accounting period because financial statements are prepared for a fixed time span during the life of an entity.

When information about two different enterprises is prepared and presented in a similar manner, it shows comparability. This helps users compare firms meaningfully.

A business enterprise that is assumed not to be sold or liquidated in the near future is said to follow the going concern concept.

The chapter states that the primary qualities that make accounting information useful for decision-making are reliability and comparability.

Recognition of expenses in the same period as the associated revenues is called the matching concept.

The concept of resolving uncertainty in favour of understating assets and revenues and overstating liabilities and expenses is conservatism or prudence.

Revenue being generally recognised at the point of sale refers to the revenue recognition concept.

The concept requiring the same accounting method to be used from one accounting period to the next is consistency.

The concept requiring accounting transactions to be free from the bias of accountants and others is objectivity.

It is necessary to assume going concern because accounting is based on the idea that the business will continue for a fairly long time. This helps in valuing assets in the balance sheet on the basis of their useful life rather than charging their whole cost to one year. It also allows expenses like depreciation to be spread over the periods in which the asset is used to earn revenue.