Accounting Principles and
Assumptions Questions with
Correct Answers
Economic Entity Assumption - Correct Answer - The m m m m mm m m
accountant keeps all of the business transactions of a sole
m m m m m m m m m m
proprietorship separate from the business owner's personal
m m m m m m m
transactions. For legal purposes, a sole proprietorship and
m m m m m m m m
its owner are considered to be one entity, but for accounting
m m m m m m m m m m m
purposes they are considered to be two separate entities.
m m m m m m m m m
Monetary Unit Assumption - Correct Answer - Economic activity is measured in U.S. dollars, and only
m m m m mm m m m m m m m m m m
transactions that can be expressed in U.S. dollars are recorded.
m m m m m m m m m m
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not
m m m m m m m m m m m m m m m
changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For
m m m m m m m m m m m m m m m m
example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2012 transaction.
m m m m m m m m m m m m m m m m
Time Period Assumption - Correct Answer - This accounting principle assumes that it is possible to report
m m m m mm m m m m m m m m m m m
the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five
m m m m m m m m m m m m m m m m m m
months ended May 31, 2012, or the 5 weeks ended May 1, 2012. The shorter the time interval, the more
m m m m m m m m m m m m m m m m m m m m
likely the need for the accountant to estimate amounts relevant to that period. For example, the property
m m m m m m m m m m m m m m m m m
tax bill is received on December 15 of each year. On the income statement for the year ended December
m m m m m m m m m m m m m m m m m m m
31, 2011, the amount is known; but for the income statement for the three months ended March 31,
m m m m m m m m m m m m m m m m m m
2012, the amount was not known and an estimate had to be used.
m m m m m m m m m m m m m
Cost Principle - Correct Answer - From an accountant's point of view, the term "cost" refers to the
m m m mm m m m m m m m m m m m m m
amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase
m m m m m m m m m m m m m m m m
happened last year or thirty years ago. For this reason, the amounts shown on financial statements are
m m m m m m m m m m m m m m m m m
referred to as historical cost amounts.
m m m m m m
Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a
m m m m m m m m m m m m m m m m
general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset
m m m m m m m m m m m m m m m m m m
Assumptions Questions with
Correct Answers
Economic Entity Assumption - Correct Answer - The m m m m mm m m
accountant keeps all of the business transactions of a sole
m m m m m m m m m m
proprietorship separate from the business owner's personal
m m m m m m m
transactions. For legal purposes, a sole proprietorship and
m m m m m m m m
its owner are considered to be one entity, but for accounting
m m m m m m m m m m m
purposes they are considered to be two separate entities.
m m m m m m m m m
Monetary Unit Assumption - Correct Answer - Economic activity is measured in U.S. dollars, and only
m m m m mm m m m m m m m m m m
transactions that can be expressed in U.S. dollars are recorded.
m m m m m m m m m m
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not
m m m m m m m m m m m m m m m
changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For
m m m m m m m m m m m m m m m m
example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2012 transaction.
m m m m m m m m m m m m m m m m
Time Period Assumption - Correct Answer - This accounting principle assumes that it is possible to report
m m m m mm m m m m m m m m m m m
the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five
m m m m m m m m m m m m m m m m m m
months ended May 31, 2012, or the 5 weeks ended May 1, 2012. The shorter the time interval, the more
m m m m m m m m m m m m m m m m m m m m
likely the need for the accountant to estimate amounts relevant to that period. For example, the property
m m m m m m m m m m m m m m m m m
tax bill is received on December 15 of each year. On the income statement for the year ended December
m m m m m m m m m m m m m m m m m m m
31, 2011, the amount is known; but for the income statement for the three months ended March 31,
m m m m m m m m m m m m m m m m m m
2012, the amount was not known and an estimate had to be used.
m m m m m m m m m m m m m
Cost Principle - Correct Answer - From an accountant's point of view, the term "cost" refers to the
m m m mm m m m m m m m m m m m m m
amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase
m m m m m m m m m m m m m m m m
happened last year or thirty years ago. For this reason, the amounts shown on financial statements are
m m m m m m m m m m m m m m m m m
referred to as historical cost amounts.
m m m m m m
Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a
m m m m m m m m m m m m m m m m
general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset
m m m m m m m m m m m m m m m m m m
