Question

For the following situations, indicate the applicable accounting principle(s)

1-Mary Jones owns a bar and a hot dog stand and operates a consulting service. She has separate financial statements for each.

2-Phish Technologies is being suedfor$3 million for breach of contract. Its lawyers believe that the damages will be minimal. Phish reports the possible loss in a note

Answer 1

Solution :

1. Mary Jones operates various business and also is a sole proprietor . For tax and legal purposes, this will be considered as a single entity however for accounting purposes and recording the varoius transactions, all the three i.e. bar business, hot dog stand and consulting must each be recorded and treated as seperate entities. This is the economiC entity assumption .

2. The priniples here are full disclosure and conservatism. It is a fundamental duty of an accountant to report any future legal obligation . If the lawsuit is diclosed as a note, the investor/lender would also come to know about the present obligation for a past event.