POA@HGV_Grace_Accounting Theories_Application

Contributions by the owner to the business must be recorded as “Capital” while withdrawal by the owner from the business for personal use must be recorded as “Drawings” in the books of the business.

State the accounting theory applied.

• Accounting entity theory

• Monetary theory

Attributes such as high employee morale or good teamwork amongst employees cannot be recorded in the books of the business as these cannot be measured in dollars and cents.

State the accounting theory applied.

• Monetary theory

• Accounting period theory

The business prepares its Statement of Financial Performance and Statement of Financial Position at the end of every 12 months.

State the accounting theory applied.

• Accounting period theory

• Going concern theory

Non-current assets are valued on the Statement of Financial Position at historical cost less accumulated depreciation.

State the accounting theory applied.

• Historical cost theory

• Consistency theory

Since the business does not expect to sell off its non-current assets soon after they are acquired, non-current assets are not valued on the Statement of Financial Position at market value. Instead, non-current assets are valued at net book value, i.e. historical cost less accumulated depreciation.

State the accounting theory applied.

• Going concern theory

• Materiality theory

Once a business has chosen to depreciate a particular type of non-current asset using a certain depreciation method, it should not change its depreciation method unless the new depreciation method more accurately reflects the pattern of usage of the non-current asset.

State the accounting theory applied.

• Consistency theory

• Materiality theory

Items of low monetary value are usually considered not material and hence are not worth recording as non-current assets.

State the accounting theory applied.

• Materiality theory

• Objectivity theory

Transactions are recorded based on source documents as they serve as evidence that transactions have taken place.

State the accounting theory applied.

• Objectivity theory

• Prudence theory

Non-current assets are valued on the Statement of Financial Position at net book value, i.e. historical cost less accumulated depreciation, to avoid overstating non-current assets.

State the accounting theory applied.

• Prudence theory

• Monetary theory

Inventory is valued on the Statement of Financial Position at cost or net realisable value, whichever is lower, to avoid overstating inventory (current assets) and to recognise the possible loss through the expense impairment loss on inventory.

State the accounting theory applied.

• Prudence theory

• Accrual basis of accounting theory