Examkin

Question

Difficulty: MediumAccounting Concepts and Conventions

Match each specific accounting transaction or treatment on the left with the accounting concept or convention that governs it on the right.

  • Charging the total cost of a ₦2,000 office wastebasket directly to expense rather than capitalizing it as a fixed assetMateriality Concept
  • Recognizing sales revenue when goods are dispatched to the customer rather than when the advance order was receivedRealization Concept
  • Valuing unsold inventory at the end of the financial year at the lower of cost and net realizable valuePrudence Convention
  • Debiting drawings for a sole trader's personal residential water bill settled using business fundsBusiness Entity Concept

Answer

Expensing small items corresponds to Materiality; revenue recognition upon dispatch corresponds to Realization; inventory valuation at lower of cost or NRV corresponds to Prudence; and separating personal bills from business expenses corresponds to the Business Entity Concept.
Each transaction is accurately paired with its governing principle: expensing low-value items relies on Materiality; recognizing revenue when risk transfers relies on Realization; conservative valuation of assets relies on Prudence; and separating personal funds from business funds relies on the Business Entity Concept.

Step-by-Step Solution

1
Analyze the treatment of low-value assets (office wastebasket).
Since the amount is negligible and does not influence financial decisions, it is governed by the Materiality Concept.
Immaterial items are expensed immediately to save administrative effort.
2
Determine when legal title and risk of goods transfer to the buyer.
Revenue is realized upon delivery/dispatch, adhering to the Realization Concept.
Earnings must be legally enforceable before being recorded in profit or loss.
3
Evaluate the valuation rule for closing inventory.
Valuing stock at the lower of cost and net realizable value follows the Prudence (Conservatism) Convention.
This prevents assets and profits from being overstated.
4
Examine the separation between owner and enterprise funds.
Recording personal bills paid via business account as drawings aligns with the Business Entity Concept.
The business is recognized as a separate accounting entity from its proprietor.

Key Concept

Application of Fundamental Accounting Concepts and Conventions
Estimated Time:1m 30s
Rate this question

Topics

Accounting Concepts and Conventions

More questions from this topic