Accounting Principles Flashcards

The conservatism principle in accounting means that when in doubt, accountants should:

Answer: Choose the method that least overstates assets and income

Conservatism (or prudence) directs accountants to recognize potential losses immediately while deferring potential gains until realized.

Which assumption underlies the practice of preparing monthly or quarterly financial statements?

Answer: Time period assumption

The time period assumption divides the business's continuous life into distinct periods for reporting purposes.

A business records revenue of $5,000 for services performed even though the customer has not yet paid. This follows which principle?

Answer: Accrual basis / revenue recognition principle

Under the accrual basis revenue recognition principle, revenue is recorded when earned, regardless of when cash is received.

A small business expenses a $15 stapler rather than depreciating it. This decision is justified by the:

Answer: Materiality principle

The materiality principle allows immaterial items to be expensed immediately since their effect on financial statements is insignificant.

Which of the following best describes the going concern assumption?

Answer: A business will continue operating indefinitely into the future

The going concern assumption presumes a business will continue to operate long enough to fulfill its obligations and objectives.

Under GAAP, which accounting basis is required for publicly traded companies?

Answer: Accrual basis

GAAP requires publicly traded companies to use accrual basis accounting, which records revenues and expenses when earned or incurred.

Which principle requires that the same accounting treatment be applied to similar items each accounting period?

Answer: Consistency principle

The consistency principle ensures that accounting methods are applied uniformly across periods to enable meaningful comparisons.