Accounting Principles Flashcards

Under the matching principle, when should the cost of goods sold be recognized?

Answer: In the same period as the related revenue is earned

The matching principle requires expenses to be recognized in the same period as the revenues they help generate.

Which accounting concept requires businesses to record transactions in the currency of the country in which they operate?

Answer: Monetary unit assumption

The monetary unit assumption states that only transactions expressible in a stable monetary unit are recorded.

A company pays $24,000 for a two-year insurance policy. Under accrual accounting, how much expense is recognized in the first month?

Answer: $1,000

$24,000 divided by 24 months equals $1,000 of insurance expense per month.

Which principle states that financial statements should disclose all information necessary for users to make informed decisions?

Answer: Full disclosure principle

The full disclosure principle requires that all relevant information be disclosed in the financial statements or accompanying notes.

A company uses FIFO for inventory in one year and switches to LIFO the next. Which accounting principle is violated?

Answer: Consistency

The consistency principle requires companies to use the same accounting methods from period to period.

Under the economic entity assumption, which of the following transactions should NOT be recorded in the business's books?

Answer: Owner's personal mortgage payment

The economic entity assumption keeps personal transactions of the owner separate from the business's financial records.

Which concept justifies recording assets at their original purchase price rather than current market value?

Answer: Historical cost principle

The historical cost principle requires assets to be recorded at their original acquisition cost, which is verifiable and objective.