Question

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)

Answer 1

a) Recording of only OMR 500 in 2019 our of OMR 1500 is example of accrual principle used in accounting. As per this principle, business should recognise those income or expenses which relates to this period irrespective of whether it is paid(received). Hence principle used is accrual principle.

b) If business borrow money then it will increase asset as well as liability of business. For example taking loan will increase cash on one side i.e. asset and simultaneously increase loan i.e. liabilities. Hence both asset and liabilities increase. Answer is yes.