Question 1

Basic accounting concepts are divided into accounting assumptions, accounting

constraints and accounting principles.

Accounting assumptions

1. Separate entity

A business and its owner are two separate entities. The business’s
transactions must be accounted separately from the owner’s transactions.
This means that transactions must be recorded from the business viewpoint,
and should not be mixed with the owner’s personal affairs.

2. Going concern

It is assumed that a business will continue to expand and operate in the

future

3. Money as a unit of measurement or monetary unit

All transactions are recorded in the country’s monetary unit. The monetary
value is assumed to be stable

4. Consistency

The same accounting method will be used from one accounting period to
another accounting period. An example of an accounting method is the
method used to calculate closing inventory.

5. Accounting period

Business activities can be divided into specific periods, for example, a month,
a quarter, six months or a year. The accounting period must be consistent in
order to enable comparison of business performance between accounting
periods.

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Accounting constraints

1. Conservatism

Business must avoid overstating values of assets and revenue, and

understating liabilities and expenses when recording transactions.

2. Materiality

Materiality refers to the relative importance or significance of an item or

event. Items that are not material need not be reported separately.

3. Benefits and costs

The cost of preparing accounting information must not exceed the value or
benefit of the information to the users of the financial statements.

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Accounting principles

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1. Historical cost

All accounting records are prepared based on the cost value or the actual
price stated in the source document, that is the current value at the time of
the transaction.

2. Objectivity

Each transaction must be recorded based on objective evidence or verified

and unbiased information

3. Full disclosure

Published accounting information must always be relevant, timely, reliable,

unbiased and free from mistakes or errors.

4. Matching of revenue and expenses

All expenses incurred to generate revenue must be reported within the period
in which the revenue is reported

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Question 2

The importance of accounting information to internal and external users

1. Accounting information can provide a picture of the financial position of a

company or business

2. The objectives of recording and analyzing accounting information are as

follows:

a) To identify the financial position of an organization, that is whether it is

making a profit or loss and the necessary follow-up actions that should
be taken

b) Transactions that are recorded are easily referred to in the future

c) Management is responsibility in a large organization may be

complicated if transactions are not recorded accurately. Financial
statements may provide an inaccurate description of the business.

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Question 3

Bookkeeping is the initial step in the accounting process, that is part of the
accounting process. The activities that are involved in bookkeeping is classifying,
recording, and summarizing business transactions.

a) Classifying

Accounting data from business documents are arranged and categorized.

Example of business documents are receipts, invoices and cash bills

b) Recording

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 Transactions are recorded in journals and ledgers.

c) Summarizing

Accounting data for a particular period is summarized in the form of financial

statements. Examples of financial statements are Trading Accounts, Profit
and Loss Account and Balance Sheets.