Question

Amos Company uses accrual accounting and issues monthly financial statements. On October 1, 2020, the company pays $100 cash for new office supplies. If Amos records an increase in "Supplies Expense" on October 1, 2020, the company has

Group of answer choices

complied with the economic entity assumption.

violated the expense recognition principle.

violated the cost principle.

complied with the expense recognition principle

Answer 1

Correct choice is: violated the expense recognition principle.

In accrual accounting the expenses and revenues are recorded when they actually happen and not when cash is received/paid. Expense recognition principle guides about recognition of expenses when they are related to the period in consideration (whether paid or not during the period).

Here, the new office supplies are paid for and recorded as expense on October 1, 2020 itself whereas there is no information regarding its usage during the month. So, it may be lying unused with business. It can not be recognised as expense for the month of October whereas it should be recorded as an asset 'Inventory'.