Question

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Accounting and the Bus S1-5 Applying accounting assumptions and principles Learnir Michael McNamee is the proprietor of a property management company, Apartment Exchange, near the campus of Pensacola State College. The business has cash of $8,000 and furniture that cost $9.000 and has a market value of $13,000. The business debts include accounts payable of $6,000. Michael's personal home is valued at $400,000, and his personal bank account has a balance of $1,200. Consider the accounting principles and assumptions discussed in the chapter, and identify the principle or assumption that best matches the situation: a. Michael's personal assets are not recorded on the Apartment Exchange's balance sheet. b. The Apartment Exchange records furniture at its cost of $9,000, not its market value of $13,000. c. The Apartment Exchange reports its financial statements in U.S. dollars. d. Michael expects the Apartment Exchange to remain in operation for the foreseeable future.

Answer 1

1. Economic entity assumption

This assumption states that the personal books and business books are to be recorded separately. For example, the investment in business is from personal books angle while it becomes capital in business books. The personal records are different from business ones and should not be synced. So, michael’s assets shall be recorded separately from business.

2. Cost principle

This states that the assets bought by the business shall be recorded at its historical cost. Cost principle completely ignores other methods as fair value and market based approach. Hence, all the assets purchased by the business shall be recorded at its original purchase cost less any depreciation. Hence, furniture is recorded at cost.

3. Monetary unit assumption

After identifying the monetary transactions, the amounts involved are termed as units. This means that all the economic transactions involved with business are to be recorded in monetary terms. Only the monetary aspect is to be recorded and not the intangible aspects like firing of employee.

4. Going concern assumption

This assumption states that business will continue for the foreseeable future unless the events are such that it will hamper the aspect of business to continue beyond period. That means the entity will not be forced to make distress sales of its asset under any circumstances and shut the shop.

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