Question

1. Briefly explain the following items, and state whether the item falls under accounting principle or assumption

1. Economic entity
2. Accrual basis accounting
3. Historical cost of an asset
4. Going concern

Answer 1

Going concern:

The going concern concept is a fundamental principle of accounting. It assumes that during and beyond the next fiscal period a company will complete its current plans, use its existing assets and continue to meet its financial obligations.

The three main assumptions we will deal with are – going concern, consistency, and accrual basis.

Historical cost of assets:

A historical cost is a measure of value used in accounting in which the value of an asset on the balance sheet is recorded at its original cost when acquired by the company. The historical cost method is used for fixed assets in the United States under generally accepted accounting principles (GAAP)

It is Accounting principles.

Accrual basis:

Financial statements are prepared under the Accruals Concept of accounting which requires that income and expense must be recognized in the accounting periods to which they relate rather than on cash basis. ... Accruals basis of accounting ensures that expenses are "matched" with the revenue earned in an accounting period.

It is Accounting assumption.

Economic activity:

Economic activity is the activity of making, providing, purchasing, or selling goods or services. Any action that involves producing, distributing, or consuming products or services is an economic activity. ... Additionally, any activities involving money or the exchange of products or services are economic activities.

It is Accounting principles.