Accounting Principles and Assumptions Questions with Correct Answers.

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