Accounting Principles & Assumptions

Question 1

Economic Entity Assumption

Answer 1

Requires business owners to keep their transactions separate from the activities of their business

Question 2

Going Concern Assumption

Answer 2

The idea that a business will continue to operate for the foreseeable future

Question 3

Monetary Unit Assumption

Answer 3

The idea that businesses record their financial activities using a stable currency (i.e. $)

Question 4

Historical Cost Principle (Cost)

Answer 4

States that assets should be recorded and reported at their original purchase price

Question 5

Revenue Recognition Principle

Answer 5

States that a company should recognize income when it has delivered a product or performed a service, regardless of when the customer actually pays

Question 6

Matching Principle (Expense Recognition)

Answer 6

Requires companies to record expenses and revenues in the same accounting period when they are related to each other

Question 7

Fair Value Principle

Answer 7

States assets and liabilities should be reported at their current market value, rather than their original purchase price

Question 8

Periodicity Assumption

Answer 8

the accounting concept that a business’s financial activities can be divided into distinct time periods (months, qtrs, years)