A-AS Level (CIE) Accounting Paper-1: Specimen Questions with Answers 4 - 4 of 93

Question 4

Question

MCQ▾

According to which of the following principles, all costs which are applicable revenue of the period should be charged against that revenue:

Choices

Choice (4)

a.

Matching

b.

Conservatism

c.

Materiality

d.

Full disclosure

Answer

a.

Explanation

This principle is important for correct determination of net profit. According to this principle, cost which are applicable to the revenue of a period should be charged against that same revenue in determining the net profit from business operations. Likewise, for matching a firm՚s costs with revenue, first a firm՚s revenues should be recognized followed by costs incurred for generating that revenue should be recognized. While matching costs with revenue following points must be taken into consideration.

  • When an item of revenue is included in the profit and loss account, all expenses incurred on it, whether paid or not, should be shown as expenses in the profit and loss account. Based on this principle, outstanding expenses, though not paid in cash are shown in the profit and loss account.
  • When some expense, say insurance premium is paid partly for the next year also. The part relating to next year will be shown as an expense only next year and not this year. It should be shown in balance sheet as an asset and others as expenditure.
  • Cost of the goods remaining unsold at the end of the year together with the expenses incurred on it must be carried forward to the next year, as these goods will be sold only during the next period. As such, the closing stock is carried over to the next period as opening stock.

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