Question

Match the GAAP with its description and a case in which the GAAP has been violated. So for each number, find the associated letter and roman numeral.

1. Business Entity Concept

2. Monetary Unit Assumption

3. Matching Principle

4. Historical Cost Principle

5. Materiality Principle

DESCRIPTIONS:

a) The accounting for a business or organization is kept separate from the personal affairs of its owner, other business or organization.

b) Each expense related to revenue earned must be recorded in the same accounting period as the revenue it helps to earn.

c) Accounting for purchases must be recorded and remain at their cost price.

d) Accountants are required to use GAAPs except when to do so would be expensive or difficult and where it makes no real difference to the decisions of users of the financial statements.

e) Accounting measures and reports the results of economic activities in terms of a stable monetary unit.

CASES OF VIOLATION

i) R. Brueht owns a construction company and believes because he is the owner, no accounting entries are needed when he removes lumber from the job-site to add a deck to his house.

ii) A used appliance store works on the cash and barter business. The bookkeeper is confused about how to record an entry, where a customer received a stove and in return owes the store 15 hours of plumbing labor.

iii) A company debited $15 to Office Equipment for the purchase of a new pencil sharpener which will be used by the business for the next 5 years.

iv) A company recorded the purchase of land at cost price and then realized the value was greatly underestimated. They wanted to change the price based on the current market value of the property.

v) A company recorded the payment for a one yearinsurance policy by debiting Insurance Expense.

Answer 1

Solution

1-a-i ( The accounting for the construction company should be kept separately from R.Brueht's personal affairs)

2-e-ii ( Economic activities are not in terms of stable monetary unit)

3-b-v ( This is against the matching principle)

4-c-iv ( Purchase of land must remain at cost price)

5-d-iii ( This transaction has no impact over the decisions of the users of the financial statements)