(Assumptions, Principles, and Constraint) Presented below are the assumptions, principles, and constraints used in this chapter.

1. Economic entity assumption 6. Measurement principle (fair value)2. Going concern assumption 7. Expense recognition principle3. Monetary unit assumption 8. Full disclosure principle4. Periodicity assumption 9. Cost constraint5. Measurement principle (historical cost) 10. Revenue recognition principle

Instructions

Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once

.(a) Allocates expenses to revenues in the proper period.

(b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)

(c) Ensures that all relevant financial information is reported.

(d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)

(e) Indicates that personal and business record keeping should be separately maintained.(f) Separates financial information into time periods for reporting purposes.

(g) Assumes that the dollar is the “measuring stick” used to report on financial performance.

Expense recognition principle –The expense recognition principle concept states that the company or the firm must recognize the expenses and revenues related to that expenses in the same period only.

Allocating the expenses to that revenues in chronological or proper order comes under the expense recognition principle.

Historical cost principle –The historical cost states that the prices of the assets must be recorded in the books of accounts at their original cost which is the amount that is spent to purchase that asset but not the market value.

The fair value of the asset changes but the original cost must be recorded in the books of accounts and comes under the measurement of historical cost principle.

Full disclosure principle –The principle states that the company must record all the transactions of the business without hiding anything.

Ensuring that all the business transactions are recorded in the books of accounts comes under the full disclosure principle.

Going concern assumption –It states that the company or the entity runs for a longer period of time. That is the reason why the prices of the plants or assets are not recorded as per the liquidation value because the company runs for a longer period of time.

Ensuring that all the business assets that are not recorded in the books of accounts at their liquidated value come under the going concern assumption.

Economic entity assumption –It states that the transactions related to business and transactions related to personal expenses must be kept separately. Business and owner are two separate entities.

Ensuring that all the business transactions books and personal transactions books that are kept separately come under the Economic entity assumption.

Periodicity assumption –It states that the transactions related to business can be reported in different time periods. The time periods can be monthly, quarterly, or annually.

Ensuring that all the business transactions are reported in different time periods comes under the Periodicity assumption.

Monetary unit assumption –It states that money is considered the unit of measurement. All the business transactions should be expressed in terms of monetary value that is rupee, dollar, euro, and so on.

Ensuring that all the business transactions are expressed in terms of monetary value comes under the Monetary unit assumption.