Question

Which practice is in accordance with US GAAP? 1. a company values assets at their market value 2. a company recognizes expenses when they incur them 3. the monetary unit principle takes inflation into account 4. the accoutning period of a buisness keeps changing 5. businesses and owners are legally dependent

Answer 1

Here, only practice number 2 ,which states a company reconizes expenses when they incur them follows the US GAAP.

According to matching principle concept and accrual basis accounting companies recognizes the expenses when they incur .Under the tge accrual system ,an expense is not recognised until it is incurred.So this makes timing of expenses and revenue very important and according to matching principle concept expense must be both incurred and offset against recognised revenues.

For example ,sales expense should be recorded in the same accounting period that sales income was made.

If we see point 1.which states company values assets at their market value is not correct according to Historical cost principle .As the entry is made based on the price at which asset was bought and not on the market value ,because market value keeps on fluctuating with time .

Point 3.which states that monetary unit principle takes inflation into account -doesn't follow the US GAAP .According to cost concept inflation is not undertaken into consideration while recording entry and while making financial reports.

Point 4.states that the accounting period of a business keeps changing ..which is wrong according to accounting period of US GAAP. Accounting period of a business can not be change every year .

Point 5.states that business and owners are legally dependent which is wrong because according to Business Entity ,business is separate from its owners.