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3. Ali Company borrowed OMR50, 000 in December 2019 for a period of three months from...

3. Ali Company borrowed OMR50, 000 in December 2019 for a period of three months from Azzan and will make its interest payment three months later. The total interest for the three months will be OMR 1500. At the end of the year 2019 in the financial statement, the company reported Interest Expense of OMR 500 in Income Statement. a. This action was the result of which accounting principle? Explain. (1 mark) b. Do you think, the borrowed money will increase the assets/ Liabilities of the business? Yes/ No Justify your answer.(1 Mark)

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Answer #1

Req a.

The Interest expense of 1 months i.e. 1500*1/3 = 500 shall be recognized in the books under the Matching principle of Accounting. The Matching principles states that the expense of the period shall be matched with the revenues of the same period so as to have the correct financial results of the business.

Req b.

The borrowed money shall be debited to Cash account and credited to Notes payable. Thus, it will increase both the assets and liabilities of the business by the amount of OMR 50,000.

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