Exam (elaborations)
Chapter 1 & 2 (Principles of Accounting).
- Module
- Ap Comp. Gov. Unit 2 test
- Institution
- Ap Comp. Gov. Unit 2 Test
Chapter 1 & 2 (Principles of Accounting).
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Chapter 1 & 2 (Principles of Accounting)The historical cost principle - ANS-This principle requires that all assets are normally
shown at cost price. It is the cost price that is used as a basis of valuation of an asset.
The business entity principle - ANS-This principle implies that the affairs of the business
are treated as being separate from the nonbusiness activities of its owner/s.
The dual aspect principle - ANS-This principle states that there are two aspects to every
transaction. One account is always debited and another is credited. These two aspects
are always equal to each other. The name given to this method of recording
transactions is : The double entry method.
The time interval principle - ANS-Financial Statements are prepared at regular intervals
of one year. This is an underlying principle of accounting.
The money measurement principle - ANS-Accounting information is concerned with
facts that: 1. can be measured in money 2. most people will agree to that money value.
The prudence principle - ANS-There are two aspects to this principle: 1. All assets
should be understated rather than overstated and all liabilities should be overstated
rather than understated. The accountant should choose the figure that will cause the
capital of the firm to be shown at a lower amount rather than at a higher one. This
ensures 'a true and fair view' of the balance sheet. 2. Profits should not be anticipated
and all loses should be recorded. This ensures 'a true and fair view' of the Profit and
Loss account.
The realisation principle - ANS-Profits should be realized on a sale when the title has
passed. Profits should be treated as realized only when realized in the form of cash or
of other assets (e.g. Trade receivables).
The going concern principle - ANS-This principle implies that the business will continue
to operate for the foreseeable future.
Consistency - ANS-Once a firm has fixed a method for the accounting treatment of an
item, it will enter all similar items that follow in the same way. If the firm does change the
method, it should be after a lot of consideration. If profits are affected by a material
amount due to a change then, either in the profit and loss account itself or in the reports
accompanying it, the effect of the change should be stated.
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