Expenses differ from losses in that they arise from the entity’s ongoing major or central operations, Losses arise from peripheral or incidental transactions.
1, Investments by owners differ from revenues and gains in that they represent transfers by owners to the entity, and they do not arise trot activities intended o produce income, Revenues differ from gains in that they arise from the entities ongoing major or central operations. Gains arise from peripheral or incidental transactions. IS, Some of the arguments which might be used are outlined below: (1) Cost is definite and reliable: other values would have to be determined somewhat arbitrarily and there would be considerable disagreement as to the amounts to be used.
2) Amounts determined by Other bases would have to be revised frequently. (3) Comparison with other companies is aided if cost is employed. (4) The costs of obtaining replacement values could outweigh the benefits derived. EXERCISE 2-4 Comparability.
Materiality. Confirmatory Value. Relevance and Faithful representation.
Comparability (Consistency. ) Neutrality. 0) Verifiability. Relevance. Timeliness Comparability, Verifiability, Timeliness, and Understandability. EXERCISE 2-5 Gains, losses.
Liabilities. Investments by owners, comprehensive income. (also possible would be revenues and gains).Distributions to owners. (Note to instructor: net effect is to reduce equity and assets). Comprehensive income Assets. Comprehensive income. Revenues, expenses.
Equity. Revenues. EXERCISE 2-6 Expense recognition principle. Measurement (historical cost principle.
) Full disclosure principle. Going concern assumption. Economic entity assumption. Periodicity assumption. Monetary unit assumption.
EXERCISE 2-9 This entry violates the economic entity assumption. This assumption in accounting indicates that economic activity can be identified with a particular unit tot accountability.In this situation, the company erred by charging this cost to the wrong economic entity. The historical cost principle indicates that assets and liabilities are accounted for n the basis of cost. If we were to select sales value, for example, we would have an extremely difficult time in attempting to establish a sales value for a given item without selling it. It should further be noted that the revenue recognition principle provides the answer to when revenue should be recognized.
Revenue should be recognized when (1) realized or realizable and (2) earned. In this situation, an earnings process has definitely not taken place.The expense recognition principle indicates that expenses should be allocated o the appropriate periods involved. In this case, there appears to be a high uncertainty that the company will have to pay.
FAST Statement No. S requires that a loss should be accrued only (1) when it is probable that the company would lose the suit and (2) the amount of the loss can be reasonably estimated. At the present time, accountants do not recognize price-level adjust-meets in the accounts. Hence, it is misleading to deviate from the measurement principle (historical cost) principle because conjecture or opinion can take place.It should also be noted that depreciation is not 50 much a matter of valuation as it is a means of cost allocation. Assets are not depreciated on the basis of a decline in their fair market value, but are depreciated on the basis of systematic charges of expired costs against revenues.
Most accounting methods are based on the assumption that the business enterprise Will have a long life. Acceptance Of this assumption provides credibility to the measurement principle (historical cost) principle, which would be Of limited usefulness if liquidation were assumed.