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Questions and Answers
What does the business entity concept state?
What does the business entity concept state?
The business entity concept holds that once a company is incorporated, it has a legal personality that is separate from its owners.
The going concern assumption means that an entity will likely cease operations in the foreseeable future.
The going concern assumption means that an entity will likely cease operations in the foreseeable future.
False
What is meant by the accounting period assumption?
What is meant by the accounting period assumption?
The accounting period assumption states that the lifespan of a company can be divided into equal artificial time periods called accounting periods.
The stable-monetary-unit assumption implies that the purchasing power of currency is ______ over time.
The stable-monetary-unit assumption implies that the purchasing power of currency is ______ over time.
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What defines a business transaction?
What defines a business transaction?
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Which of the following is NOT considered an expense in accounting?
Which of the following is NOT considered an expense in accounting?
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Study Notes
Business Entity Concept
- When a company is incorporated, it is legally distinct from its owners.
- The company carries out all business activities on behalf of its owners.
- The accounting system tracks and reports on the company's performance, separate from its owner’s personal affairs.
Going Concern Assumption
- Assumes the company is financially sustainable and will continue operating in the foreseeable future.
- Allows for the use of existing assets for their intended purpose.
Accounting Period Assumption
- The lifespan of a company can be divided into equal time periods called "Accounting Periods".
- These periods are typically one month, three months, or one year.
- The default is one-year, starting January 1st and ending December 31st.
Stable Monetary Unit Assumption
- Accounting uses currency (e.g. USorCD or CDorCD) as the primary unit of measurement.
- Assumes the purchasing power of currency is stable over time, allowing for comparisons across different reporting periods.
Financial Accounting Information System
- The system is based on the accounting equation: Assets = Liabilities + Owner's Equity
- It uses financial statement elements: Revenue, Expenses, Assets, Liabilities, and Owner’s Equity (including capital and retained earnings).
Business Transaction
- Legally binding agreement between the company and a third party.
- Involves the exchange of resources (goods, services, cash, assets).
- Results in two opposite sides of equal monetary value: resources surrendered and resources received.
Transaction Requirements
- The agreement is executed by at least one party.
- The monetary value of exchanged resources is known and measurable.
- The agreement will impact the company's financial position.
- The agreement directly affects the company's performance.
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Description
This quiz covers the foundational concepts of accounting, including the Business Entity Concept, Going Concern Assumption, Accounting Period Assumption, and Stable Monetary Unit Assumption. Test your understanding of how these principles guide financial reporting and business operations.
