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Difficulty: MediumAccounting Concepts and Conventions

Match each practical accounting treatment described on the left with its corresponding governing accounting concept or convention on the right.

  • Recording a motor vehicle at its original purchase cost of ₦8,000,000\text{₦}8,000,000 rather than its current estimated market value of ₦9,500,000\text{₦}9,500,000.Historical Cost Concept
  • Debiting owner drawings when business funds are used to pay for the owner's domestic utility bill.Business Entity Concept
  • Recognizing revenue from goods sold on credit when delivered to the customer rather than when cash payment is received.Realization Concept
  • Valuing closing stock at the lower cost price of ₦1,200,000\text{₦}1,200,000 instead of its higher net realizable value of ₦1,450,000\text{₦}1,450,000.Prudence (Conservatism) Convention

Answer

The correct matches are: 1. Recording motor vehicles at acquisition cost matches the Historical Cost Concept; 2. Recording personal expenses as drawings matches the Business Entity Concept; 3. Recognizing sales revenue upon delivery matches the Realization Concept; 4. Valuing inventory at the lower of cost and net realizable value matches the Prudence Convention.
Each accounting scenario corresponds directly to a specific concept: recording assets at purchase cost complies with Historical Cost; separating personal and business transactions via drawings enforces Business Entity; recognizing income when earned upon delivery follows Realization; and preventing overstatement of inventory assets obeys Prudence.

Step-by-Step Solution

1
Analyze each scenario on the left to identify its governing financial reporting objective.
Item 1 relates to asset valuation; Item 2 relates to business/personal boundary; Item 3 relates to revenue recognition timing; Item 4 relates to conservative stock valuation.
Matching items requires isolating the fundamental accounting rule operationalized by each accounting practice.
2
Pair each practical treatment with its corresponding theoretical concept or convention.
Original acquisition cost valuation maps to Historical Cost; owner personal transaction isolation maps to Business Entity; point-of-sale revenue recording maps to Realization; avoiding asset overstatement maps to Prudence.
Each practical accounting treatment directly implements one of the recognized accounting concepts or conventions.

Key Concept

Accounting Concepts and Conventions
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Topics

Accounting Concepts and Conventions

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