Principles and Assumptions

Question 1

Economic Entity Assumption

Answer 1

-a business is a separate entity from its owners

Why it matters: the business’ financial activities must be kept separate from the business owner’s financial activities

Question 2

Reliability Assumption

Answer 2

Companies may only record transactions that can be verified through documents such as invoices, billing statements, receipts, and bank statements

Question 3

Full Disclosure Principle

Answer 3

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

Question 4

Conservatism Assumption

Answer 4

If there are uncertainties in how to report something, choose the option that shows less income or asset benefit or shows potential losses.

Question 5

Materiality Principle

Answer 5

An accounting standard can be ignored if the impact has such a small effect on financial statements that it would not be misleading
-very subjective; ask for advice when needed

Question 6

Consistency Principle

Answer 6

After adopting an accounting method, maintain it; only change it if the new version improves reporting.

-applies to line items on all financial statements and reports

Question 7

Monetary Unit Assumption

Answer 7

One currency is used throughout all accounting activities, and inflation is not a consideration.

Question 8

What does it mean if a business is a “going concern”? How should the business operate? (Going Concern Assumption)

Answer 8

Being a going concern means the business is stable enough to operate and meet obligations for the foreseeable future.

If a business is a going concern, it makes decisions based on the objective of continuing to run the business.

Question 9

What does it mean if a business is no longer a “going concern”? What should the business do? (Going Concern Assumption)

Answer 9

It means the business is NOT stable enough to operate and meet obligations for the foreseeable future.

If the business is no longer a going concern, it should report the issues that are putting it at risk.

Question 10

Revenue Recognition Principle

Answer 10

Revenue should be recognized on the income statement when it is earned, regardless of when or if the money changes hands.

Question 11

Matching Principle

Answer 11

Expenses should be recognized on the income statement in the same period as the revenue they helped to generate.