Accounting Principles

Question 1

Business entity principle

Answer 1

a business enterprise is separate and distinct from its owner or investor.

Question 2

Business entity principle examples

Answer 2

If the owner has a barber shop, the cash of the barber shop should be reported separately from personal cash. o The owner had a business meeting with a prospective client. The expenses that come with that meeting should be part of the company’s expenses. If the owner paid for gas for his personal use, it should not be included as part of the company’s expenses.

Question 3

Going concern principle

Answer 3

business is expected to continue indefinitely.

Question 4

Examples of Going Concern

Answer 4

A state-owned company is in a tough financial situation and is struggling to pay its debt. The government gives the company a bailout and guarantees all payments to its creditors. The state-owned company is a going concern despite its poor financial position

Question 5

Time period principle

Answer 5

financial statements are to be divided into specific time intervals.

Question 6

time period principle example

Answer 6

an income statement or statement of cash flows may cover the “Eight Months ended August 31.” However, the balance sheet is dated as of a specific date, rather than for a range of dates. Thus, a balance sheet header might state “as of August 31.”

Question 7

Monetary unit principle

Answer 7

amounts are stated into a single monetary unit

Question 8

Monetary unit principle examples

Answer 8

Jollibee should report financial statements in pesos even if they have a store in the United States.

IHOP should report financial statements in dollars even if they have a branch here in the Philippines

Question 9

Objectivity principle

Answer 9

financial statements must be presented with supporting evidence

Question 10

Objectivity principle examples

Answer 10

When the customer paid Jollibee for their order, Jollibee should have a copy of the receipt to represent as evidence.

When a company incurred a transportation expense, a voucher should be prepared as evidence

Question 11

Cost principle

Answer 11

accounts should be recorded initially at cost

Question 12

Cost principle example

Answer 12

When Jollibee buys a cash register, it should record the cash register at its price when they bought it.

When a company purchases a laptop, it should be recorded at the price it was purchased.

Question 13

Accrual Accounting Principle

Answer 13

revenue should be recognized when earned regardless of collection and expenses should be recognized when incurred regardless of payment. On the other hand, the cash basis principle in which revenue is recorded when collected and expenses should be recorded when paid. Cash basis is not the generally accepted principle today.

Question 14

Accrual Accounting Principle Example

Answer 14

When a barber finishes performing his services he should record it as revenue. When the barber shop receives an electricity bill, it should record it as an expense even if it is unpaid

Question 15

Matching principle

Answer 15

ost should be matched with the revenue generated

Question 16

Matching principle examples

Answer 16

When you provide tutorial services to a customer and there is a transportation cost incurred related to the tutorial services, it should be recorded as an expense for that period.

Question 17

disclosure principle

Answer 17

all information should be included in an entity’s financial statements that would affect a reader’s understanding of those statements.

Question 18

disclosure principle example

Answer 18

For example, the company is facing a lawsuit resulting from disposing of poison material into the water, and it will be a large penalty.

Based on the Full Disclosure Principle, the entity is required to disclose this information in its Financial Statements fully.

Question 19

Conservatism principle

Answer 19

also known as prudence. In case of doubt, assets and income should not be overstated while liabilities and expenses should not be understated.

Question 20

Conservatism principle examples

Answer 20

the entity should recognize the liabilities that claim to the employee for the legal case even the entity not sure if they are failing. And the recognition should be at the highest value.

But, the entity should recognize assets for legal claims from an employee unless there is a clear statement from the court.

Question 21

Materiality principle

Answer 21

in case of assets that are immaterial to make a difference in the financial statements, the company should instead record it as an expense.

Question 22

Materiality principle examples

Answer 22

A school purchased an eraser with an estimated useful life of three years. Since an eraser is immaterial relative to assets, it should be recorded as an expense.