30 Important Accounting Principles Questions and Answers [With PDF]

The 10thchapter of our accounting learning course is “Accounting Principles”. In this article, we’ll learn the 30 most important accounting principles questions and their answers.

It will help you understand the important Accounting Principles terms and their explanations quickly.

By reading this post, you may quickly prepare for accounting courses and for any competitive tests such as school and college exams, vivas, job interviews, and so on.

So let’s get started…

Accounting Principles Questions and Answers 

The 30 important accounting principles questions and answers are as follows:

Question 01: What is Conceptual Framework?

Answer: A conceptual framework is an intelligent or consistent system of interconnected objectives and fundamentals that can lead to consistent standards, and it prescribes the nature, function, and limits of financial accounting and financial statements.

Question 02: What are the Objectives of Financial Reporting?

Answer: The objectives of financial reporting are to provide information that will help current and potential investors, creditors, and other users make sound investments, credit, and other decisions.

Question 03: What are the Qualitative Characteristics of Accounting Information?

Answer: Qualitative characteristics of accounting information are those that aid in distinguishing between more useful information and less useful information.

Question 04: What are the Primary Characteristics of Accounting Information?

Answer: The following are the primary characteristics of accounting information:

Relevance: Information becomes relevant when it has the potential to influence a decision. To be relevant, information should have the following characteristics: predictive value, feedback value, and timeliness.

Reliability: Information can be trusted if it is free of errors and bias. The information must be verifiable, faithful in representation, and neutral to be considered reliable.

Question 05: What are the Secondary Characteristics of Accounting Information?

Answer: The following are the secondary characteristics of accounting information:

Comparability: Comparability states that information becomes more useful if it allows for intra- and inter-comparison.

Consistency: Consistency states that the accounting terms, methods, or principles mentioned in the financial statements must be applied consistently from one period to the next.

Question 06: What are the Basic Elements of Financial Statements?

Answer: The basic elements of financial statements are as follows:

  • Assets
  • Liabilities
  • Owner’s Equity
  • Revenue
  • Expenses
  • Gains and Losses

Question 07: What is The Difference between Income and Gain?

Answer: Income is defined as the excess of revenues earned over expenses incurred in the normal course of business. Income is generated from the sale of goods or services. However, the gain is generated by the sale of fixed or non-current assets.

Question 08: What is Monetary Unit Assumption?

Answer: According to this assumption, only transaction data that can be expressed in terms of money (in our country, USD) should be included in accounting records.

Question 09: What is Economic Entity Assumption?

Answer: The business is treated as a separate unit or entity from its owner under this assumption (s).

In other words, an entity’s transactions must be kept separate from those of its owner and all other economic entities. To the extent of his or her capital, the owner is treated as a creditor.

Question 10: What is Going Concern Assumption?

Answer: This is also known as the ‘Continuity assumption.’ The central tenet of this assumption is that a business will continue to exist indefinitely, or at least long enough to carry out its existing plans and contracts.

Question 11: What is the Application of Going Concern Assumption?

Answer: The application of the going concern assumption is as follows:

  • Plant assets should be recorded at their purchase price
  • Depreciation or amortization of these assets is charged.
  • The assets and liabilities are classified as current and non-current.
  • A classified balance sheet and income statement are prepared.

Question 12: What is Accounting Period Assumption?

Answer: According to the going concern assumption, the life of a business organization is infinite.

According to this assumption, the business organization’s infinite life is divided into small chunks of time. It could be one month, three months, six months, or a year. Usually, a year is the most common for reporting to outsiders.

Question 13: What is Principle?

Answer: A principle is a broad general law or rule that is used as a guideline for action.

Question 14: What are Generally Accepted Accounting Principles (GAAP)?

Answer: Generally Accepted Accounting Principles (GAAP) are the broad rules adopted by the accounting profession to serve as guides in identifying (measuring), recording, and communicating (reporting) an organization’s economic events.

Question 15: Who is Primarily Responsible for Establishing GAAP in the USA?

Answer: Two organizations are primarily responsible for establishing GAAP in the USA:

  • Financial Accounting Standard Board (FASB); and
  • Securities and Exchange Commission (SEC)

Question 16: What is Cost Principle?

Answer: This principle states that tangible fixed or non-current assets should be recorded at their acquisition costs, regardless of market value.

The cost of something is the exchange value or financial sacrifice required to obtain it. The market value of an asset is determined by the market at the time of sale.

Question 17: What Is the Reason for Cost-Based Valuation?

Answer: You might wonder why tangible fixed (non-current) assets are recorded at cost. This is due to the fact that cost has a significant advantage over other valuations.

The cost is consistent. The values exchanged during the acquisition process can be objectively measured and verified. Objectively means supporting documents such as an invoice, voucher, deed, and so on.

Question 18: What is The Limitations of the Cost Principle?

Answer: Critics contend that cost is frequently irrelevant and that market values provide more useful information.

This principle disregards the qualitative aspect of things, and the impact of inflationary changes in financial statements is not adjusted.

Because of these constraints, developed countries such as Japan and the United States have implemented an inflation accounting system.

Question 19: What is Revenue Recognition Principle?

Answer: Recognizing entails documenting and reporting. Thus, the revenue recognition principle refers to the rules or laws governing the recording of revenue in accounting records and its reporting in the income statement.

This is also known as the realization principle. This principle focuses on the ‘timing’ of revenue recording.

According to this principle, revenue should be recorded when it is earned, and revenue is earned (realized or realizable) when goods or services are sold or provided, whether in cash or on credit.

Question 20: What is The Example of the Revenue Recognition Principle?

Answer: Assume you sold 100 Burgers to a customer for $10 each and received $800 in cash out of a total of $1,000. As a result, $200 remains a receivable.

This principle states that both received and receivable amounts must be recorded as revenues. Similarly, when goods or services are purchased in cash or on account, expenses are recorded.

Question 21: What is the Matching Principle?

Answer: This principle states that a period’s revenues and expenses must be properly matched.

The expenses incurred to earn that revenue must be charged in the period in which the revenues are recognized in order to achieve the correct income for the period in question.

Question 22: What is the Full Disclosure Principle?

Answer: Full disclosure entails presenting all relevant information (relevant for user decision-making). We know that an organization gets its money from its owners and its creditors.

As a result, stakeholders have the right to be informed about relevant data and information, as well as supporting footnotes and explanations.

The data and information should be provided in such a way that they are self-explanatory.

In accordance with this principle, additional data, explanations, schedules, and so on are attached as supplementary information to assist users in making decisions.

Question 23: What are Constraints in Accounting?

Answer: Constraints denote limitations or boundaries within which accounting functions or policies are restricted.

Question 24: What is Cost-Benefit Constraint?

Answer: According to the Cost-Benefit Relationship, the cost of information should not outweigh the benefit derived. Costs and benefits are not always derivable, obvious, or quantifiable, and sound judgment must be used.

Question 25: What is The Example of Cost-Benefit Constraint?

Answer: If an organization buys some waste-paper baskets for use, they may be used for a couple of years, but the cost of these baskets is so low that organizations charge it as an expense even if it will provide benefits or services for more than a year.

Office supplies such as pens, pencils, erasers, pins, and so on should be recorded as expenses rather than assets. The cost of recording these as assets (for example, charging depreciation on erasers) outweighs the benefit.

Question 26: What is Materiality Constraint?

Answer: The term ‘materiality’ refers to an item’s or event’s relative importance and amount in a user’s decision.

A material item is one whose presence or absence would influence or change the judgment of a reasonable person (investor).

As a result, determining what is material and what is immaterial is based on a reasonable person’s judgment; precise criteria cannot be applied.

Question 27: What is Conservatism Constraint?

Answer: This constraint is in violation of the principle of full disclosure. Because the profit is understated under this convention compared to the actual profit. “Anticipate no profit, but plan for all possible losses,” as the saying goes.

Question 28: What is The Limitation of Conservatism?

Answer: The main limitation of conservatism is that excessive application of this convention results in the formation of a secret reserve. It is not recognized by company law.

Question 29: What is the Application of Conservatism?

Answer: The application of Conservatism is as follows:

  • Keeping a reserve for doubtful debts.
  • For equipment and machinery, use the accelerated depreciation method.
  • Inventory is valued at a lower cost or market price.
  • The potential gain from the sale of a share is not recognized.
  • Unrealized gains are not recorded until they are realized.

Question 30: What are Industry Practices?

Answer: This constraint states that the unique nature of some industries and business concerns necessitates a departure from basic accounting theory at times.

The financial statements must not deceive the reader. If applying “pure” accounting theory results in statements that are not comparable, consistent, relevant, or reliable, then the theory should be adjusted.

I hope that by the end of this post, you have a good understanding of the “Accounting Principles” chapter.

You will gain a better understanding of the “Accounting Principles” chapter if you read these 30 important accounting principles questions and answers on a regular basis.

You can read the previous chapters of our accounting learning course here if you missed them.

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