10 BASIC ACCOUNTING PRINCIPLES
AND GUIDELINES(FULLY SOLVED)
Economic Entity Assumption - answer Allows the accountant to keep the sole proprietor's
business transactions separate from the owner's personal transactions even though a sole
proprietorship is not legally separate from the owner.
Monetary Unit Assumption - answer An accounting guideline where the U.S. dollar is assumed
to be constant (no change in purchasing power) over time. This allows an accountant to add one
dollar from a transaction in 1946 to one dollar in 2018 and to show the result as two dollars. It
also means that items that cannot be expressed in dollars do not appear in the financial
statements.
Time Period Assumption - answer Guideline that allows the accountant to divide up the
complex, ongoing activities of a business into periods of a year, quarter, month, week, etc. The
precise time period covered is included in the heading of the income statement, statement of
cash flows, and the statement of stockholders' equity. Also known as the periodicity
assumption.
Cost Principle - answer Guideline requiring amounts in the accounts and on the financial
statements to be the actual cost rather than the current value. Accountants can show an
amount less than cost due to conservatism, but accountants are generally prohibited from
showing amounts greater than cost. (Certain investments will be shown at fair value instead of
cost.)
Full Disclosure Principle - answer Guideline that requires information pertinent to an investing
or lending decision to be included in the notes to financial statements or in other financial
reports.
Going Concern Principle - answer Guideline which allows the readers of financial statements to
assume that the company will continue on long enough to carry out its objectives and
commitments. In other words, the accountants believe that the company will not liquidate in
the near future. This assumption also provides some justification for accountants to follow the
cost principle.
AND GUIDELINES(FULLY SOLVED)
Economic Entity Assumption - answer Allows the accountant to keep the sole proprietor's
business transactions separate from the owner's personal transactions even though a sole
proprietorship is not legally separate from the owner.
Monetary Unit Assumption - answer An accounting guideline where the U.S. dollar is assumed
to be constant (no change in purchasing power) over time. This allows an accountant to add one
dollar from a transaction in 1946 to one dollar in 2018 and to show the result as two dollars. It
also means that items that cannot be expressed in dollars do not appear in the financial
statements.
Time Period Assumption - answer Guideline that allows the accountant to divide up the
complex, ongoing activities of a business into periods of a year, quarter, month, week, etc. The
precise time period covered is included in the heading of the income statement, statement of
cash flows, and the statement of stockholders' equity. Also known as the periodicity
assumption.
Cost Principle - answer Guideline requiring amounts in the accounts and on the financial
statements to be the actual cost rather than the current value. Accountants can show an
amount less than cost due to conservatism, but accountants are generally prohibited from
showing amounts greater than cost. (Certain investments will be shown at fair value instead of
cost.)
Full Disclosure Principle - answer Guideline that requires information pertinent to an investing
or lending decision to be included in the notes to financial statements or in other financial
reports.
Going Concern Principle - answer Guideline which allows the readers of financial statements to
assume that the company will continue on long enough to carry out its objectives and
commitments. In other words, the accountants believe that the company will not liquidate in
the near future. This assumption also provides some justification for accountants to follow the
cost principle.
