Questions and Answers
What does the Expense Recognition Principle prescribe?
What does the Full Disclosure Principle require?
What are the four Accounting Assumptions?
Going-concern assumption, monetary unit assumption, time period assumption, business entity assumption
What does the Going Concern Assumption imply?
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What does the Monetary Unit Assumption state?
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What is the Time Period Assumption?
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What does the Business Entity Assumption ensure?
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What is a Sole Proprietorship?
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What is a Partnership?
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What is a Limited Partnership (LP)?
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What is a Limited Liability Partnership (LLP)?
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What is a Limited Liability Company (LLC)?
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What defines a Corporation?
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What is Double Taxation?
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What are Qualified Dividends?
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Study Notes
Accounting Principles and Assumptions
- Expense Recognition Principle (Matching Principle): Requires recording expenses incurred to generate reported revenue, essential for accurate financial reporting.
- Full Disclosure Principle: Mandates detailed reporting behind financial statements, often through footnotes, to ensure informed decision-making by users.
Key Accounting Assumptions
- Going Concern Assumption: Assumes a business will continue operating, affecting the valuation of assets reported at cost rather than liquidation value.
- Monetary Unit Assumption: Permits expressing transactions in monetary terms, establishing a common denominator for accounting; companies may use multiple currencies based on operations.
- Time Period Assumption: Suggests a company's lifespan can be divided into time periods (months/years) for reporting purposes.
- Business Entity Assumption: Treats a business as a separate entity from its owners, necessitating distinct financial information for effective decision-making.
Business Structures
- Sole Proprietorship: Owned by one person, no legal distinction between owner and business; advantages include tax simplicity, while disadvantages include unlimited liability for debts.
- Partnership: Owned by two or more individuals with shared liability; requires an agreement on profit/loss sharing; may have unlimited liability unless structured as specific types of partnerships.
Types of Partnerships
- Limited Partnership (LP): Comprises general partners with unlimited liability and limited partners whose liability is restricted to their investment.
- Limited Liability Partnership (LLP): Shields partners from liabilities arising from the negligence of other partners while still being accountable for partnership debts.
Limited Liability Company (LLC)
- Combines limited liability benefits of a corporation with the tax advantages of a partnership, popular for proprietorships and partnerships.
Corporations
- Corporation: A legal entity separate from its owners, responsible for its actions and debts; provides limited liability to owners (shareholders), protecting personal assets.
- Double Taxation: Refers to taxation at both the corporate level and on dividends received by shareholders, leading to a higher overall tax burden.
Additional Terms
- Qualified Dividends: Special tax treatment rates for specific dividends, typically lower than ordinary income tax rates, encouraging investment in corporations.
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Description
Test your knowledge on key accounting principles and assumptions that shape financial reporting. This quiz covers vital concepts such as the Expense Recognition Principle, Full Disclosure Principle, and essential assumptions like Going Concern and Monetary Unit. Perfect for accounting students and professionals alike.