accounting theories

• Accounting period theory


  (Trial balance & finnancial balence)

  The life of a business is divided into regular time intervals (yearly)
• Going concern theory


  (Trial balance & financial statement)

  A business is assumed to have an indefinite economic life unless there is credible evidence that is may close down
• Accrual basis of accounting theory


  (Expenses—prepaid & payable)

  expenses must be recognised in the period and services have been used, regardless of whether they have been paid or not
• Matching theory


  (Cost of sales, NCA)

  The cost incurred to buy inventory must be matched against the sales revenue earned from selling the inventory in the same accounting period to determine the gross profit for that period
• Consistency theory


  (NCA)

  once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison
• Historical cost theory


  (acct. info. system)

  transactions should be recorded at their original cost
• Materiality theory


  (NCA- revenue expenditure)

  Relevant information should be reported in the financial statements if it is likely to make a difference to the decision-making process.
• Prudence theory


  (inventory-loss )

  The business must report and adjust for losses that it is likely to incur, even though the losses may not be confirmed yet.