Question

Gregory Charles owns two different businesses – a roof repair firm and a painting company. During the current year, the roofing business made a net income of $75,000 while the painting company lost $50,000.  In order to show himself in a less profitable way, Gregory combined the two businesses under a single name – Roof n Paint Company.  He then reported to all interested parties a $25,000 net income for the year.  Each company has a uniquely issued IRS Employer Identification Number.

Write a statement indicating which accounting principle Gregory is violating. Explain why his method of reporting violates this principle.
Paradigm Publishing, Inc. 5^th Edition College Accounting, Robert L Dansby, Burton S Kaliski, Michael D Lawrence.

Answer 1

Since each company has a uniquely issued IRS Employer Identification Number, then separte income tax return should have been filed.
Separate legal entity princilpal is voilated here
It means a legal entity, typically a business, that is defined as detached from another business or individual with respect to accountability. A separate legal entity may be set up in the case of a corporation or a limited liability company, to separate the actions of the entity from those of the individual or other company. The method of combining the two business is not justified. It leads to misrepresentation of company accounts.