Part 1: Accounting Principles

Question 1

Matching Principle

Answer 1

Revenues and their associated expenses should be recognized in the same reporting period.

Question 2

Revenue Recognition Principle

Answer 2

A business recognizes its revenues when the goods or services are provided to the customer, regardless of when the payment is received.

Question 3

Periodicity Assumption

Answer 3

A business can report its financial results within specific time periods. This usually involves reporting results and cash flows regularly, such as monthly, quarterly, or annually.

Question 4

Going Concern Assumption

Answer 4

A business is stable enough to operate and meet obligations for the foreseeable future. The business acts and makes decisions based on the objective of continuing to run the business, rather than liquidating the business.

Question 5

Monetary Unit Assumption

Answer 5

One currency is used throughout all accounting activities. Inflation is not a consideration in recording finances.

Question 6

Consistency Principle

Answer 6

When a business adopts a specific accounting method, it will enter all similar items in the exact same way in the future. Only change an accounting principle or method if the new version improves reporting.

Question 7

Materiality Principle

Answer 7

An accounting standard can be ignored if the impact has such a small effect on financial statements that it would not be misleading.

Question 8

Conservatism Assumption

Answer 8

When bookkeepers and accountants are uncertain and need to determine how to report an item, conservatism guides them to choose the option that shows less income or asset benefit. Potential losses can be recorded, while potential gains cannot.

Question 9

Full Disclosure Principle

Answer 9

All information that is relative to the business and is important to a lender or investor has to be disclosed in financial statements or in the notes of the statements.

Question 10

Reliability Assumption

Answer 10

It is mandatory for companies to record only accounting transactions that can be verified through invoices, billing statements, receipts, and bank statements.

Question 11

Economic Entity Assumption

Answer 11

The business is a separate entity, so the activities of a business must be kept separate from any other financial activities of the business owners.