A business has the following items to consider at the year end. Item Treatment Goods sold on credit, not yet paid for Revenue recorded at date of sale Wages...
Question 1 Report
A business has the following items to consider at the year end.
| Item | Treatment |
|---|---|
| Goods sold on credit, not yet paid for | Revenue recorded at date of sale |
| Wages earned by employees in December | Expense recorded in December |
| Electricity consumed but bill not received | Expense accrued in accounts |
Answer Details
The correct answer is Accruals.
The accruals (or matching) concept requires that revenue and expenses are recognised in the period in which they are earned or incurred, not when cash is received or paid. All three items in the table illustrate this: goods sold on credit are recorded as revenue at the date of sale (not when cash is received), wages earned in December are recorded as a December expense (regardless of payment date), and electricity consumed but not yet billed is accrued as an expense in the current period.
Prudence relates to caution in recognising profits. Materiality concerns whether items are significant. Business entity separates owner and business transactions. None of these explain why all three items are recognised based on when they were earned or incurred rather than when cash changed hands.
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