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ACT201.17_1921499030

Ans to the question number: 2

1. Cost Principle: The cost principle is an accounting principle that

records assets at their respective cash amounts at the time the
asset was purchased or acquired. For example, when a retailer
purchases inventory from a vendor, it records the purchase at the
cash price that was paid. The cost is equal to the amount paid in
the transaction.

2. Economic Entity Assumption: The economic entity assumption

is an accounting principle that separates the transactions carried
out by the business from its owner. For example, Alam owns a
car shop. On March 12, Alam bought a bike for himself. This
event is Alam's personal cost and it is not related to the business.
So, this event should be kept separate from the business.

3. Monetary Unit Assumption: The monetary unit concept is an

accounting principle that assumes business transactions or events
can be measured and expressed in terms of monetary units and
the monetary units are stable and dependable. For instance, if a
company’s quality of service or product reduces, under the
monetary unit assumption this event won't be recorded even
though the information is important. It is because cannot be
measured in monetary terms.
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4. Going Concern: The going concern concept of accounting

implies that the business entity will continue its operations in the
future and will not liquidate or be forced to discontinue operations
due to any reason. For instance, a state-owned company is in a
tough financial situation and is struggling to pay its debt. The
government gives the company a bailout and guarantees all
payments to its creditors. The state-owned company is a going
concern despite its poor financial position.

5. Periodicity: Periodicity is the accounting concept used to prepare

and present financial statements into the artificial time required
by internal management, shareholders, or investors. For example,
if the reporting period for the current year is set at calendar
months, then the same periods should be used in the next year so
that the results of the two years can be compared on a month-to-
month basis.

6. Revenue Recognition Principle: The revenue recognition

principle states that revenue should be recognized and recorded
when it is realized or realizable and when it is earned. For
example, John’s Dry-Cleaning Company gave service on July 31,
but customers did not claim and pay for their clothes until the first
week of September. John should record the revenue when the
services were performed rather than in September when it
received the cash.
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7. Matching Concept: The matching concept is a founding

principle of accounting. It illustrates that an expense must be
recorded in the same period as the income to which it is related.
For example, a company pays 10% commissions to sales
representatives at the end of each month. If the company has
$50,000 in sales in the month of December, the company will pay
the commission of $5,000 in the next month which is January.
According to the matching concept, the commission expense is
recorded in the income statement of December.

8. Accrual Basis of Accounting: Accrual accounting is a method

of accounting where revenues and expenses are recorded when
they are earned, regardless of when the money is received or paid.
For example, you would record revenue when a project is
completed, rather than when you get paid.

9. Dual Aspect of Accounting: Dual aspect concept states that

since every transaction has a dual effect, the accounting records
must reflect the same to show the accurate movement of funds.
For instance, a buyer pays cash in return for a purchased item
while the seller gains cash in return for the sold item. This makes
a transaction dual in nature, affecting two accounts
simultaneously, and hence it should be registered likewise.