Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881



Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem

Brief Exercise 2-28 Assumptions and Principles

Five common accounting practices are listed below:

  1. A customer pays $20 to mail a package on December 30. The delivery company recognizes revenue when the package is delivered in January.
  2. Jim Trotter owns C&S Heating Company. In preparing the financial statements, Trotter makes sure that the purchase of a new truck for personal use is not included in C&S’s financial statements.
  3. Moseley Inc. recorded land at its purchase price of $50,000. In future periods, the land is reflected in the financial statements at $50,000.
  4. Mack Company purchases inventory in March. However, it does not expense that inventory until it is sold in April.
  5. Mueller Inc. prepares quarterly and annual financial statements.


Identify the amounting principle or assumption that best describes each practice

To determine


Revenue Recognition: The principle of revenue recognition emphasizes that all the incomes and revenues should be recorded when it is earned during the accounting period.

Economic Entity: The concept of economic entity assumes that the owner and its business should be treated as two different entities.

Historical Cost: The principle of historical cost is concerned with the assets being recorded at its purchasing price in the books of accounts. It means that all the assets will be shown at it purchasing price till the time it is sold.

Matching: According to this principle all the expenses should be recorded in same accounting period in which its revenue is recognized. The primary purpose behind this principle is to show an accurate net income or loss during an accounting period.

Time-Period: All the financial information and statements are prepared based on predetermined accounting period. It signifies that all the accounting records should be concluded at the end of each accounting period to evaluate the ultimate financial performance of a business enterprise.

To identify:

Identify the accounting principle or assumption that best describes each practice.



Although the delivery company receives the cash of $20 from the customer on December 30 but the revenue is recognized when package is delivered which the company did in January. When the company receives the cash, it is recorded as liabilities (Unearned Revenue) but when the package is delivered, it becomes revenue for that accounting period. Hence it is revenue recognition principle.


Jim Trotter, the owner of C&S Heating Company making sure to not include the new truck in the financial statements represents the economic entity assumption of accounting. The economic entity concept separates the personal property of the owner from the assets of the company...

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