Financial Accounting and Reporting: Understanding Accounting Concepts
What are the key accounting concepts that apply to the given statements?
1. Jenna Asare is the sole owner of Asare Appliances. Jenna borrowed $100,000 to buy a new home to be used as their personal residence. This liability was not recorded in the records of Asare Appliances.
2. Apple inc. distributes an annual report to its shareholders.
3. Hewlett-Packard corporation depreciates machinery and equipment over their useful lives.
4. Crosby Company lists land on its balance sheet at $120,000, its original purchase price, even though the land has a current fair value of $200,000.
5. Honeywell international inc. records revenue when products are delivered to customers, even though the cash has not yet been received.
6. Liquidation values are not normally reported in financial statements even though many companies do go out of business.
7. IBM Corporation, a multibillion-dollar company, purchased some small tools at a cost of $800. Even though the tools will be used for a number of years, the company recorded the purchase as an expense.
Answer:
The accounting concepts that apply to the statements are the separate entity concept, reporting concept, and matching concept.
Statement 1: The accounting concept that applies to this statement is the separate entity concept. According to this concept, the personal financial affairs of the owner should be kept separate from the business transactions and should not be mixed together.
Statement 2: The accounting concept that applies to this statement is the reporting concept. Companies are required to provide annual reports to their shareholders that include financial statements and other relevant information.
Statement 3: The accounting concept that applies to this statement is the matching concept. The depreciation of machinery and equipment over their useful lives is considered an expense that should be matched with the revenue generated by using those assets in the business operations.
These accounting concepts are fundamental principles that guide the preparation and presentation of financial statements to ensure accuracy, transparency, and consistency in financial reporting.