Question

For each of the three situations, state if the accounting method used is correct or incorrect. If correct, identify which principle or assumption supports the method used. If incorrect, identify which principle or assumption has been violated.

a. Tina Company owns buildings that are worth substantially more than they originally cost. In an effort to provide more relevant information, Tina reports the buildings at fair value in its acconting reports.
b. Kingston Company includes in its accounting records only transaction data that can be expressed in terms of money.
c. Roger Holloway, owner of Roger's Photography, records his personal living costs as expenses of the business.

Answer 1

a. INCORRECT.

Principle violated : HISTORICAL COST PRINCIPLE

Under GAAP, fixed assets should be recorded at their original cost in the balance sheet. In recording at fair value, Tina Company is in violation of this.

b. CORRECT.

Principle used: MONETARY UNIT ASSUMPTION

Under this principle, transactions should have a monetary value that it can be expressed in in the books so as to ensure that it is measurable.

c. INCORRECT.

Principle violated : SEPERATE ENTITY ASSUPTION

This principle states that the personal transactions of the owner and that of the business should be recorded separately so that the business's financial records can be as accurate as possible.