Accounting principles

Revise Accounting principles for Accounting 7707 (O Level) — revision notes, 76 practice questions and instant AI marking.

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Cambridge O Level Accounting 7707

Accounting Principles

The big idea: Ten agreed rules make accounts from different businesses, and different years, mean the same thing. Most exam questions give a situation and ask which principle applies, so learn each one with a picture of when it is used.

Summary — What This Chapter Covers

Recording rules: business entity, money measurement, duality, historic cost.
Measuring profit: matching, realisation, prudence.
Presentation and judgement: consistency, materiality, going concern.
Explain each principle, and recognise it in an accounting entry or adjustment.

1. Recording Principles

Syllabus 7.1 · Paper 1 & 2

What gets recorded, and how

Principle	Meaning	Where you see it
Business entity	The business is treated as separate from its owner. Only business transactions are recorded.	Capital is a liability of the business to the owner; the owner’s private car is not a business asset; goods taken for own use are drawings.
Money measurement	Only items that can be measured reliably in money are recorded.	Staff skill and customer loyalty are not recorded.
Duality	Every transaction has two aspects, recorded as a debit and an equal credit.	Double entry; the accounting equation always balances.
Historic cost	Assets are recorded at their original cost price.	Premises stay at cost even when their market value rises.

Practice Question 1

The owner of a shop paid her daughter’s school fees of $1,200 from the business bank account. Name the principle that tells the book-keeper how to record this, and give the entry.

2. Measuring Profit

Syllabus 7.1 · Paper 1 & 2

Matching, realisation, prudence

Principle	Meaning	Where you see it
Matching (accruals)	Revenue and the expenses incurred to earn it are recorded in the period they relate to, not when cash is paid or received.	Accrued and prepaid expenses and income; depreciation; closing inventory.
Realisation	Revenue is recognised when it is earned: when the goods pass to the customer (or the service is done), not when the order is taken or the cash received.	A credit sale is revenue on delivery even though the customer pays later.
Prudence	Do not overstate profits or assets, or understate liabilities. Provide for likely losses; do not anticipate gains.	Inventory at the lower of cost and net realisable value; provision for doubtful debts.

Worked Example

Rent of $400 per month is payable. During the year ended 31 December the business paid $4,800, and the December rent was still owing. (a) State the principle used and calculate the rent expense. (b) Inventory cost $2,600; it can be sold for $3,100 after repairs costing $900. State the principle and the value.

Practice Question 2

On 28 December a customer ordered goods worth $5,000. They were delivered on 6 January and paid for on 31 January. The year end is 31 December. In which year is the revenue recorded? Name the principle.

3. Consistency, Materiality and Going Concern

Syllabus 7.1 · Paper 1 & 2

Judgement in presentation

Principle	Meaning	Where you see it
Consistency	Once a method is chosen, use it every year, so that results can be compared.	Keep the same depreciation method and inventory valuation method.
Materiality	Items too small to affect a user’s decisions need not be treated strictly; they can be simplified.
Going concern

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Accounting principles