Question

Indicate whether each of the following statements is true or false:

1. The principle of conservatism requires that accountants understate the company’s asset valuations and reported profits.

2. The materiality principle suggests that transactions involving minor dollar amounts need not be processed.

3. The general ledger is that set of accounting records from which figures for the balance sheet and income statement are drawn.

4. Copies of checks sent to vendors to settle accounts payable represent important source documents.

5. The realization principle requires that orders from customers not be recorded in the sales journal at the time the order is received.

6. The consistency principle requires that all companies within a particular industry follow consistent accounting procedures.

Answer 1

1. False, because principle of conservatism recognise expenses and liabilities as soon as possible when there is uncertainity about the outcome and it only organize the revenues and assets when they are assured of being received.

2. True, materiality principle ignores the small items and values as the cost of effort in allocation of small items in over a long period does not tell the benefit arrived from the operation and this cost is treated as expense of the current year.

3. False, a general ledger represent the recording of transaction with debit and credit account records violated by a trial balance.

4. False, copies are not included in important source document whereas checks are included in important source document.

5. False, under realization principle, revenue is recognized by the seller when it is earned irrespective of whether cash from the transaction has been received or not.

6. False, consistency principle tells that once you decided to use this principle in your business, you need to stick with and follow this principle through out the accounting periods.