Exam (elaborations)
Accounting Principles (2)
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Accounting Principles (2)
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Accounting PrinciplesEconomic Entity Assumption - ANS-The accountant keeps all of the business
transactions of a sole proprietorship separate from the business owner's personal
transactions For legal purposes, a sole proprietorship and its owner are considered to
be one entity, but for accounting purposes they are considered to be two separate
entities
Monetary Unit Assumption - ANS-Economic activity is measured in U.S. dollars, and
only transactions that can be expressed in U.S. dollars are recorded.
Because of this basic accounting principle, it is assumed that the dollar's purchasing
power has not changed over time. As a result accountants ignore the effect of inflation
on recorded amounts. For example, dollars from a 1960 transaction are combined (or
shown) with dollars from a 2013 transaction.
Time Period Assumption - ANS-This accounting principle assumes that it is possible to
report the complex and ongoing activities of a business in relatively short, distinct time
intervals such as the five months ended May 31, 2013, or the 5 weeks ended May 1,
2013. The shorter the time interval, the more likely the need for the accountant to
estimate amounts relevant to that period. For example, the property tax bill is received
on December 15 of each year. On the income statement for the year ended December
31, 2012, the amount is known; but for the income statement for the three months
ended March 31, 2013, the amount was not known and an estimate had to be used.
It is imperative that the time interval (or period of time) be shown in the heading of each
income statement, statement of stockholders' equity, and statement of cash flows.
Labeling one of these financial statements with "December 31" is not good enough—the
reader needs to know if the statement covers the one week ended December 31, 2012
the month ended December 31, 2012 the three months ended December 31, 2012 or
the year ended December 31, 2012.
Cost Principle - ANS-From an accountant's point of view, the term "cost" refers to the
amount spent (cash or the cash equivalent) when an item was originally obtained,
whether that purchase happened last year or thirty years ago. For this reason, the
amounts shown on financial statements are referred to as historical cost amounts.
Because of this accounting principle asset amounts are not adjusted upward for
inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of
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