10 BASIC ACCOUNTING PRINCIPLES AND GUIDELINES(FULLY SOLVED)

Economic Entity Assumption 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 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 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 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 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 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. Matching Principle Requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. Revenue Recognition Principle Guideline requiring that revenues be shown on the income statement in the period in which they are earned, not in the period when the cash is collected. Materiality Guideline that permits the violation of another accounting guideline if the amount is insignificant. Conservatism Guideline states that if doubt exists between two acceptable alternatives (in other words the accountant needs to break a tie), the accountant should choose the alternative that will result in a lesser asset amount and/or a lesser profit.