Accounting Principles and Concept

The Going Concern Assumption assumes that a business will:

• Continue operating in the foreseeable future

• Change its business model frequently

• Only exist until its initial capital is spent

• Close within a year

Answer explanation

Which of the following situations would challenge the Going Concern Assumption?

• The business is expanding to new locations

• The business is experiencing financial losses with no plan for recovery

• The business is increasing its inventory purchases

• The business hired more employees

Answer explanation

If a business is struggling—maybe it has too much debt or isn’t making enough money. There is a real chance that it might close soon (this is called a Going Concern Problem), accountants change how they prepare financial statements to show that the business may not last. In this case, they use a Terminating Concern approach, which treats the business as if it will close.

What does the Accounting Entity Concept mean?

• Business transactions should be mixed with personal transactions

• Financial statements should include both business and personal expenses

• A business is a separate entity from its owner(s)

• The owner’s financial activities are recorded in the company’s books

Answer explanation

The Periodicity Assumption requires businesses to:

• Report financial performance continuously without breaks

• Never prepare financial reports

• Change the accounting period frequently

• Report financial results at regular, defined intervals

Answer explanation

Which of the following is NOT a valid accounting period?

• Every Two Years

• Monthly

• Quarterly

• Annually

Answer explanation

Accounting periods are used to measure and report financial performance regularly. Common accounting periods include:

• Weekly

• Monthly

• Quarterly (every 3 months)

• Semi-annually (every 6 months)

• Annually (every 12 months)

However, "Every two years" (biennially) is not a standard accounting period because financial statements must be prepared regularly to provide timely information to users such as investors, management, and regulatory agencies. A two-year gap would delay critical financial data and decision-making.

Thus, "Every two years" is not a valid accounting period under standard accounting principles.

Under the Accrual Basis of Accounting, income is recorded when:

• Cash is received

• The income is earned, even if cash is not yet received

• A customer places an order

• The expenses are paid

Answer explanation

Which of the following is an example of an Accrued Expense?

• A company pays rent for the next six months in advance

• A company receives a payment before delivering the product

• Salaries are owed to employees but not yet paid

• A business receives cash before completing the service

Answer explanation

The Monetary or Measurement Principle states that:

• Businesses can record transactions in any currency without consistency

• All assets must always increase in value over time

• Businesses should not record transactions that involve cash

• Only financial transactions expressed in money are recorded

Answer explanation

Which of the following transactions would NOT be recorded under the Monetary Principle?

• Purchase of a new machine

• The skills of an experienced employee

• Rent paid for an office

• A bank loan received

Answer explanation

The Realization Concept states that income is recorded when:

• The transaction is earned or completed

• Cash is received

• The company plans to sell a product

• A customer shows interest in a product

Answer explanation