Question

Combining the personal expenses of Mr Ali with the expenses of his business, Ali Auto Shop, would violate the

	a.	Cost principle.
	b.	Ethics principle.
	c.	Monetary unit assumption.
	d.	Economic entity assumption.

Answer 1

Before answering the question, let us first understand in brief the meaning of all the four terms:

1. Cost Principle: The main elements of cost principle are:

• Cause-Effect Relationship: ...
• Charge of Cost Only after its Incurrence: ...
• Past Costs Should not Form Part of Future Costs: ...
• Exclusion of Abnormal Costs from Cost Accounts: ...
• Principles of Double Entry Should be Followed Preferably

2. Ethics Principle: The main elements of ethics principle are:

• Integrity
• Objectivity
• Professional Competence and Due Care
• Confidentiality
• Professional Behaviour

3. Monetary Unit assumption: Monetary unit assumption states that only those events and transactions are recorded in books of accounts of the business which can be measured and expressed in monetary terms. Any information that cannot be expressed in terms of money is useless for financial accounting purposes and is therefore not recorded.

4. Economic entity assumption: An accounting principle/guideline that allows the accountant to keep the sole proprietor's business transactions separate from the owner's personal transactions even though a sole proprietorship is not legally separate from the owner.

Hence, Combining the personal expenses of Mr Ali with the expenses of his business, Ali Auto Shop, would violate the ECONOMIC ENTITY ASSUMPTION (OPTION "D").