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True or False Accounting Concepts

1. Assets = Liabilities + Owners Equity


Answer: True. This is the basic accounting equation, showing that the
ownership of assets can be divided into two, namely, the owners equity (the
part that the owner owns) and liabilities (the part that creditors who lent
assets to the business)
2. Assets Liabilities = Owners Equity
Answer: True. This accounting equation shows that the owners equity is just
the residual interest in the assets after the creditors contributions to the
business are paid back to them.
3. Assets Owners Equity = Liabilities
Answer: False. Although this is true when applying the rules of algebra,
Liabilities are never residual interests, but liabilities are prioritized when
determining who is the owner of such assets in the business
4. The use of asset method generally results in higher income even if
adjustments are made at year-end
Answer: False. When adjustments are made, the resulting net income will be
the same whether the asset or expense method is used. This is one of the
purposes of adjusting entries; to report the proper amount of income, assets,
and liabilities recognized during the year.
5. Assets are presented in the statement of financial position as of the year end
Answer: True. The statement of financial position presents real accounts at
a given point in time, hence, the use of the term as of. This is because
the measurement of assets, liabilities, and owners equity is measured at a
point in time, and for a period of time. This will be further explained in the
succeeding questions

6. Income and expenses are presented in the statement of comprehensive


income as of the year end
Answer: False. Income and expenses are earned/incurred throughout the
year, meaning, it is not frozen in a point in time. Rather, income and
expenses gradually happen in the process of doing business, hence, the
term for the year ended is the more appropriate term to define the
comprehensive income. The same is true for the statement of cash flows and
statement of changes in equity for the year ended xxxx, as these three
financial statements present the changes that happen during the year,
and not the status of the business as of the year end (the status of the

business is represented by the statement of financial position for the year


ended xxxx)
7. The conceptual framework lays down specific rules in applying accounting
principles
Answer: False. The conceptual framework is merely a guide to follow in
applying accounting principles. When in doubt, one can refer to the
framework to apply the accounting policies, but in cases of conflict between
the standards and the framework, the specific accounting standards shall
prevail over the framework, as the standards are the rules on how to account
for specific items, and rules are always to be followed.
8. All fixed assets except land, are subject to depreciation expense
Answer: False. Fixed assets, in general are subject to depreciation, with the
exception of land which is not depreciated. However, even Property, Plant,
and Equipment (more commonly known as PPE) that are normally subject to
depreciation, stops depreciating when they are fully depreciated
already. But take note that even if an asset is fully depreciated, the company
can still use it, with its carrying amount being equal to the salvage value, but
it will not be depreciated anymore.
*Cost Salvage Value = Depreciable cost (the portion of cost that can be
depreciated. Once this reaches zero, it means that the asset is fully
depreciated)
*Depreciable cost / Useful life of the asset in years = annual depreciation
(take note of the relevant dates, namely, the acquisition date, balance sheet
date, end of useful life, and the date when the asset is sold, as all of these
determine the amount of depreciation recorded within the year)
*Cost accumulated depreciation = Carrying value = Book value =
Depreciated cost

9. Uncollectible accounts expense (otherwise known as uncollectible accounts


expense or doubtful accounts expense) is never debited when writing off a
receivable under the allowance method
Answer: False. While it is true that it is the allowance that is debited when
writing off an account, there are some cases wherein the amount written off
(10,000) is greater than the current balance of the allowance (8,000)
and in such a case, uncollectible accounts expense is debited for the balance
(2,000)
10.All adjustments done at year end may be reversed at the beginning of the
year

Answer: False. Most of the adjustments that can be reversed relates to


prepaid/accrued expenses, as well as accrued/unearned income. On the other
hand, some adjustments such as the ones for depreciation and
uncollectible accounts are not reversed.
11.All cash items are considered current assets

Answer: False. The general rule is that cash is classified as the same
classification of the purpose for which it is intended to be used. Explanation
for this can be seen below:
Cas
h

Unrestrict
ed

Reported under
the
account title
Cash

Restricted for
a specific
purpose

Settlement of a
currently
maturing
liability

Reported as a
financial asset
(current asset)

Settlement of a
long term
liability, or
restricted for the
purchase of a
non-current
asset
(regardless of
when the

Reported as
other financial
asset (plant
expansion/bon
d sinking fund)
as a noncurrent asset
12.Income and expenses are real accounts which are closed to the income
summary at the end of the accounting period

Answer: False. Income, expenses, as well as drawings and income summary


are all nominal accounts, meaning, they disappear from the statement of
financial position after closing entries have been made. On the other hand,
real accounts (assets, liabilities, and owners equity, as well as their
corresponding contra accounts such as accumulated depreciation for PPE,
and allowance for doubtful accounts for receivables) are those that do not
disappear from the statement of financial position unless they have 0
balance at the end of the year.

13.

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