Accounting Principles and Assumptions
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Questions and Answers

What does the Expense Recognition Principle prescribe?

  • Record expenses incurred to generate revenue (correct)
  • Ignore expenses in financial reporting
  • Delay recording expenses until paid
  • Record revenue when cash is received

    • What does the Full Disclosure Principle require?

  • Report only summary financial statements
  • Disclose details that impact users' decisions (correct)
  • Keep financial statements confidential
  • Neglect footnotes in financial reporting

    • 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?

    <p>The business will continue operating</p> Signup and view all the answers

    What does the Monetary Unit Assumption state?

    <p>Transactions and events can be expressed in monetary units</p> Signup and view all the answers

    What is the Time Period Assumption?

    <p>The life of a company can be divided into time periods</p> Signup and view all the answers

    What does the Business Entity Assumption ensure?

    <p>Business is accounted for separately from its owner</p> Signup and view all the answers

    What is a Sole Proprietorship?

    <p>A business owned by one person</p> Signup and view all the answers

    What is a Partnership?

    <p>A business owned by two or more people</p> Signup and view all the answers

    What is a Limited Partnership (LP)?

    <p>Includes a general partner with unlimited liability and limited partners with restricted liability</p> Signup and view all the answers

    What is a Limited Liability Partnership (LLP)?

    <p>Restricts partners' liabilities to their own acts</p> Signup and view all the answers

    What is a Limited Liability Company (LLC)?

    <p>Offers limited liability of a corporation and tax treatment of a partnership</p> Signup and view all the answers

    What defines a Corporation?

    <p>A business legally separate from its owners</p> Signup and view all the answers

    What is Double Taxation?

    <p>Corporate income and dividends taxed</p> Signup and view all the answers

    What are Qualified Dividends?

    <p>Dividends taxed at lower rates based on specific requirements</p> Signup and view all the answers

    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.

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