Unit 4 Assignment 1
1. Accrual Basis Accounting: Under the accrual basis accounting, business transactions specifically those relating to income and expenses are recognized and recorded in the books the moment the substance of the transaction has been perfected. Generally Accepted Accounting Principles (GAAP) prefers that financial statements are based entirely on the accrual basis accounting instead of the cash basis accounting. In its simplest terms, the accrual basis accounting assumes that income is recognized when earned regardless of the date of payment. On the other hand, expenses are recorded when incurred regardless of whether it was paid in cash or in credit terms.
Going ...view middle of the document...
Financial statements are prepared at regular intervals known as accounting periods in order to enhance the comparability within the entity and the usefulness of the financial information contained in the statements.
Monetary Value/Unit Assumption: The monetary value assumption also known as the monetary unit assumption holds that each business transaction is expressed in terms of a common unit of measure – a common currency that has legal tender. Transactions are expressed in terms of money and it is known to all that an income or expense transaction is to be paid in terms of cash.
2. (1) Accruals concept: revenue and expenses are recorded when they occur and not when the cash is received or paid out;
(2) Consistency concept: once an accounting method has been chosen, that method should be used unless there is a sound reason to do otherwise;
(3) Going concern: the business entity for which accounts are being prepared is in good condition and will continue to be in business in the foreseeable future;
(4) Prudence concept (also conservation concept): revenue and profits are included in the balance sheet only when they are realized (or there is reasonable 'certainty' of realizing them) but liabilities are included when there is reasonable 'possibility' of incurring them.
(5) Accounting equation: total assets equal total liabilities plus owners' equity;
3. 1. Economic Entity Assumption: The accountant keeps all of the business transactions of a sole proprietorship separate from the business own er's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities.
2. Monetary Unit Assumption: Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown) with dollars from a 2013 transaction.
3. Time Period Assumption: This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2013, or the 5 weeks ended May 1, 2013. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2012, the amount is known; but for the income statement for the three months ended March 31, 2013, the amount was not known and an estimate had to be used.
4. Cost Principle: From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item...