Question

Question 1
(1) An item of stock costing $60,000 was written down to its realizable value of $35,000.
(2) School fees paid to the proprietor's son was debited to the Drawings account.
(3) $2,500 paid for a printer was written off as expense(instead of being capitalized).
(4) Assets like inventory are valued in dollars, not units, for the financial statements.
(5) Company reports revenue when it is earned instead of when the cash is collected.
(6) Assets will normally be recorded at their historical cost in balance sheet.

Required:

Identify the name of the concept or principle for the above events.

Answer 1

1. An item of stock costing $60,000 was written down to its realizable value of $35,000.

Answer: Conservatism Concept (future losses are to be recorded but not the gains)

(2) School fees paid to the proprietor's son was debited to the Drawings account.

Answer: Business Entity Concept (the transaction of business are recorded separately from its owners)

(3) $2,500 paid for a printer was written off as expense(instead of being capitalized).

Answer: Materiality Concept (transaction can be ignored if it has a small impact on the financial statements)

(4) Assets like inventory are valued in dollars, not units, for the financial statements.

Answer: Monetary Concept (every transaction has to e recorded in its moentory value)

(5) Company reports revenue when it is earned instead of when the cash is collected.

Answer: Accruals Concept (every transaction is recorded when it is earned/ incurred and not collected/ paid)

(6) Assets will normally be recorded at their historical cost in balance sheet.

Answer: Cost Concept (all assets will be recorded at their purchase/ historical cost)