Question

Sleek Ride, a limo services company with a December 31 year-end date, experienced various transactions in the first 10 days of June. What accounting principle does this scenario relate to?

a) Accrual accounting
b) Cash accounting
c) Matching principle
d) Materiality principle

Answer 1

The scenario pertaining to Sleek Ride and its transactions in June corresponds to the accrual accounting principle, where transactions are recorded when they occur rather than when cash is exchanged.

Step-by-step explanation:

The scenario of Sleek Ride, a limo services company, experiencing various transactions at the beginning of June with a fiscal year-end date of December 31, relates to the accrual accounting principle.

This principle dictates that transactions and events are recognized when they occur (not necessarily when cash is received or paid), and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

Thus, the income and expenses for Sleek Ride are recorded in June, even though the fiscal year ends in December.

Under the accrual accounting method, if Sleek Ride earns revenue from providing services in June, that revenue is reported in the June financial statements regardless of when the payment is actually received.

Conversely, if Sleek Ride incurs expenses related to those services in June, those expenses are reported in the June financial statements, even if the payment is made at a later date.

This differs from cash accounting, where transactions are only recorded when cash is exchanged.