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Answers

Here are the answers to the short quiz on Fundamental Accounting Concepts. You are free to review the lessons if you are having trouble with this section.

A. Identification / Fill in the Blanks

Under the accrual basis of accounting, income is recognized when earned regardless of when collected; and expenses are recognized when incurred regardless of when paid.

It refers to the assumption than an entity will exist indefinitely in the absence of evidences that suggest otherwise. Going concern

The indefinite life of an entity is subdivided into equal periods. Time period

Calendar year refers to a 12-month period ending in December 31.

Fiscal year refers to a 12-month period ending in any month other than December.

It means that a specific business enterprise is considered one accounting entity, separate and distinct from its owners. Accounting entity concept

What are the two characteristics of the monetary unit assumption?
a. Quantifiability – transactions are recorded in terms of money
b. Stability of the currency – purchasing power of the dollar is stable

The matching principle states that expenses are recognized in the period the related revenues are earned.

B. Determine if the given is a/n Asset, Liability, Capital, Income or Expense.

Prepaid Insurance – Asset
Light and Water – Expense
Employees' Salaries – Expense
Accounts Payable – Liability
Mr. Bruno, Capital – Capital

Accounts Receivable – Asset
Service Revenue – Income
Service Equipment – Asset
Bonds Payable – Liability
Office Supplies – Asset

C. Indicate whether the account is a Current Asset (CA), Non-Current Asset (NCA), Current Liability (CL), or Non-Current Liability (NCL).

Inventories – CA
Prepaid Advertising – CA
Accounts Payable – CL
Bonds Payable, 3 yrs. – NCL
Accrued Rent Payable – CL

Cash in Bank – CA
Land – NCA
Building – NCA
Delivery Equipment – NCA
Accounts Receivable – CA

D. Case Problem. The following accounts pertain to the records of Sharkbait Company at the end of the accounting period:

Assets	$ 1,200,000		Revenues	$ 500,000
Liabilities	$ ?		Expenses	$ 300,000

The company started the year with $800,000 Capital. The owner made $100,000 cash withdrawals during the year. No additional contributions were made. How much is the total liabilities at the end of the period?

Answer: $300,000. In solving this problem, the accounting equation A = L + C is used. However, we need to compute for the balance of Capital first. We know that Capital is increased by additional contributions and income, and decreased by expenses and withdrawals. The capital ending balance and liabilities are computed as follows: