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ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting

Zenith Ltd buys a delivery van for $40,000 and expects to use it for five years. The finance director records the cost as an asset and charges depreciation each year instead of expensing the whole $40,000 in the year of purchase. Which accounting concept is mainly being applied?

The accruals (matching) concept is being applied. The van will generate benefits over five years, so its cost is allocated across those years through depreciation instead of being charged entirely in the year of purchase, matching expenses to the revenue they help earn.

  1. AAccruals (matching)Correct
  2. BPrudence applied to cash received
  3. CBusiness entity
  4. DHistorical cost applied to the revaluation of assets

Explanation

Under the accruals concept, costs are matched to the periods in which the related benefits (revenue) are earned. The van benefits five years, so its cost is spread through depreciation. The business entity concept concerns separating owner and business, not spreading costs.

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