Ali Company borrowed OMR50, 000 in December 2019 for a period of three months from Azzan and will make its interest payment three months later. The total interest for the three months will be OMR 1500. At the end of the year 2019 in the financial statement, the company reported Interest Expense of OMR 500 in Income Statement. a. This action was the result of which accounting principle? Explain. b. Do you think, the borrowed money will increase the assets/ Liabilities of the business? Yes/ No Justify your answer.
Ali Company borrowed OMR50, 000 in December 2019 for a period of three months from Azzan and will make its interest payment three months later. The total interest for the three months will be OMR 1500. At the end of the year 2019 in the financial statement, the company reported Interest Expense of OMR 500 in Income Statement. a. This action was the result of which accounting principle? Explain. b. Do you think, the borrowed money will increase the assets/ Liabilities of the business? Yes/ No Justify your answer.
(a)
This reporting of $500 interest expense in 2019 financial statement shows the accrual concept of accounting.
Accruals Concept of accounting requires that income and expense must be recognized in the accounting periods to which they relate rather than on a cash basis. Although interest payments are to be made after 3 months, one month expense pertaining to 2019 should be reported in 2019 as per accrual accounting and the company did the same.
Step by step
Solved in 2 steps
