Accounting Principles
Accounting Principles
Accounting Principles
Q1. Discuss three of the accounting principles and assumptions with examples. (1 Mark)
Answer:
Revenue and expense principle
Here, revenues and expenses are calculated and an interview takes place between them, to find out
the value of profits and losses in the activities of the institution, according to the accounting accrual.
Expenses paid or payable thereafter are announced, with recognition of revenues, whether they are
The principle of revenue recognition states that the accountant must record the company's revenue
immediately after the sale of the good or the completion of the provision of a service, regardless of
whether the price of this good or service was received immediately after its sale or even after a
For example, if an insurer receives $24,000 on December 28, 2021 to provide insurance protection
for 2022, the insurer will report revenue of $2,000 in each of the twelve months in 2022.
The historical cost principle states that an asset should always be recorded at the original purchase
price or cost and not the perceived value, and therefore, any changes in the asset's market value
Suppose the land was purchased for 20,00,000 in 2015, and now the value of that land has increased
to 50,00,000 in 2020. The land is already recorded in the records for 20,00,000 and will be recorded
at the same time until is achieved. It will not increase its value in the books of accounts.
Q2. In chapter 3, slide 42, there is a summary of the accounting cycle. Describe each step. (2 Marks)
College of Administration and Finance Sciences
Answer:
The organization begins its accounting cycle by recording transactions using journal entries.
After the company posts the journal entries to individual general ledger accounts, an
The return balance ensures that the total debit is equal to the total creditor in the financial
records.
At the end of the period, adjustment entries are prepared, which is the final result after
making the necessary corrections and the results from the passage of time. For example, a
settlement entry may include interest income that is earned over time.
After the adjustment entries are posted, the company prepares the adjusted trial balance,
The entity closes temporary accounts, income and expenses at the end of the period using
Finally, the company prepares a post-closing trial balance to ensure debtor and creditor
matching.
College of Administration and Finance Sciences
Q3. Explain the purpose and the importance of the income statement, and prepare the income
statement for ABC company based on the following information taken from the trial balance in 2020
(2 Marks)
Answer:
Purpose of the income statement: The income statement displays the company's revenues and
sales, and by tracking the list, it is possible to accurately know the size of the company's profit and to
know the main source of the company's business from which that profit is achieved.
Importance of Income Statement: It helps to determine the risk of not achieving certain cash flows,
which allows the user to estimate the impact of the change in demand for the company's product on
Income SAR
Expense