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ACCA Applied Knowledge · Financial Accounting · The context and purpose of financial statements for external reporting

Kora Co buys a machine for $40,000 and expects it to be used for five years. It charges the cost to profit or loss over those five years rather than all in the year of purchase. Which accounting concept is mainly being applied?

The accruals concept is being applied. The machine's cost is allocated to the five periods in which it provides benefits, so expenses are matched with the income they help generate, instead of being charged entirely in the year when cash was paid.

  1. AAccruals (matching of costs with the related income)Correct
  2. BPrudence in recognising all costs immediately
  3. CGoing concern, because the machine is sold at once
  4. DMateriality, because the cost is small

Explanation

Spreading the cost over the years in which the machine generates benefits matches expense with the income it helps produce, which is the accruals basis. Immediate expensing would ignore this, and a $40,000 cost is not described as immaterial.

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