Accounting Basics

Question 1

Economic Entity Assumption

Answer 1

The business is its own separate entity, distinct from its owners.

Question 2

Full Disclosure Principle

Answer 2

Any information lenders or investors might need to make informed decisions should be disclosed in the financial statements or accompanying notes.

Question 3

Reliability Assumption

Answer 3

The information in financial documents is verifiable and backer by proper documentation.

Question 4

Conservatism Assumption

Answer 4

When you are not sure if or how to record an item, this principle guides us to err on the side of caution. It means we choose options that show less income or asset benefit. Potential losses can be recorded, while potential gains cannot.

Question 5

Materiality Principle

Answer 5

This principle allows you to focus on what really matters. It states that if an accounting standard has such a small impact on the financial statements that it wouldn’t mislead anyone, you can ignore it.

Question 6

Consistency Principle

Answer 6

Once a business adopts a certain accounting method for recording certain items, it commits to entering all similar items in the same way in the future.

Question 7

Monetary Unit Assumption

Answer 7

States that you use one currency throughout all of your accounting activities.

Question 8

Going Concern Assumption

Answer 8

Assures that the business is stable enough to operate and meet its obligations for the foreseeable future. It acts with the intention of continuing to run the business rather than liquidating it.