Accounting principles and concepts questions and answers with rated solutions

Accounting principles and concepts questions and answers with rated solutions Economic Entity company keeps its activity separate from its owners and other businesses Going Concern company to last long enough to fulfill objectives and commitments - assumes that any entity will continue to operate indefinitely. In this basis, assets are recorded based on their original cost and not on market value. Assets are assumed to be used for an indefinite period of time and not intended to be sold immediately Monetary Unit money is the common denominator; currency should be the same -The business financial transactions recorder and reported should be in monetary unit, such as USD, CANADIAN DOLLAR, EURO, etc. Periodicity - this principle entails a business to complete the whole accounting process of a business over a specific operating time period. It may be monthly, quarterly, or annually. For annual accounting period, it may follow a calendar/ fiscal year. - company can divide its economic activities into time periods. Measurement/ cost principle -all business resources acquired should be values and recorded based on actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation. -The most commonly used measurements are based on historical cost and fair value. Revenue Recognition (ABA) -this principle requires that revenue should be recognized and recorded the time it is incurred, regardless of the time that cash is paid expense recognition (ABA) - this principle requires that expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid -expenses should be recognized in the same period as the revenues to which they relate. Accrual basis of accounting/ matching principle This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business. Full Disclosure - this principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping and financial recording should be performed with independence, that's free of bias and prejudice. Materiality - Ideally, business transactions that may affect the decision of a user of financial information are considered important, thus, must be reported properly. This principle allows errors or violations of accounting valuation involving small amount of recorded business transaction - an amount may be considered less important because of its size in comparison with revenues and expenses, assets and liabilities, or net income. P1 is not important to financial statement of SM conservatism - This principle states that given 2 options in the valuation of business transactions, the amount recorded should be lower rather than the higher value - so that FS dont overstate the company's financial position industry practices the nature of certain industries and their practices can require the departure of traditional accounting theory.