Question

Identify the letter for the principle or assumption from A through F in the blank space next to each
numbered situation that it best explains or justifies.
A. General accounting principle
B. Measurement (cost) principle
C. Business entity assumption
D. Revenue recognition principle
E. Expense recognition (matching) principle
F. Going-concern assumption
_____ 1. In December of this year, Chavez Landscaping received a customer’s order and cash
prepayment to install sod at a house that would not be ready for installation until March of next year.
Chavez should record the revenue from the customer order in March of next year, not in December of
this year.
_____ 2. If $51,000 cash is paid to buy land, the land is reported on the buyer’s balance sheet at
$51,000.
_____ 3. Mike Derr owns both Sailing Passions and Dockside Digs. In preparing financial statements
for Dockside Digs, Mike makes sure that the expense transactions of Sailing Passions are kept
separate from Dockside Digs’s transactions and financial statements.

Answer 1

1.

Answer - Revenue Recognition (Point E)

Revenue recognition or matching principle means booking of revenue in the correct period. In this case the installation will be in March of next year so revenue should be recorded then and not now.

2.

Answer - Measurement Principle

Measurement or historical cost principle means an asset should be valued at its historical cost instead of being revalued. So in this case valuation of land at the cost paid for it means

3.

Answer - Business Entity Assumption

Business entity assumption means that a business is separate from its owners. So in this case while preparing the financials it should only be prepared for the entity in question not the entities where owner is the same.