Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What constitutes a Simple Contract?

1. No compensation required

2. Intention and agreement on terms are essential

3. Must be in writing

4. Requires at least two witnesses

The correct answer is: Intention and agreement on terms are essential

A simple contract is fundamentally defined by the essential elements that establish its existence. Intention and agreement on terms are crucial because they signify that both parties have communicated their willingness to enter into a mutual agreement. This implies that there is a meeting of minds, which is foundational to the concept of a contract. A simple contract does not necessarily need to be in writing; it can be formed through verbal agreements or even through conduct. Thus, the requirement for written documentation or witnessed signatures is not applicable in the case of a simple contract. The focus is primarily on the clear intention of the parties involved and their agreement on the key terms, which validates the contract and binds the parties to their obligations. In summary, the importance of intention and mutual agreement in a simple contract underlines the necessity for clarity in the terms agreed upon, recognizing that these components establish a valid, enforceable agreement between the parties involved.