principle, constraint, or assumption

For the following transactions, identify which principle, constraint, or assumption would apply:

  1. Assume a partnership’s business is going to continue indefinitely.
  2. Based upon the dollar amount of cash paid or received, transactions are recorded.
  3. An accountant may ignore expense accounts with low dollar balances when deciding which expense accounts they may want to increase spending on.
  4. Benefits of a new software system should be greater than the costs to implement the new software system.
  5. Business owners should keep their personal financial records separate from their business’ financial records.
  6. Accounting records should ignore the effects of inflation.

Question 2

Ace Accounting’s financial records include the following accounts:

  • Advertising Expense
  • Accounts Payable
  • Andy Ace, Withdrawals
  • Cash
  • Software
  • Rent Expense
  • Bank Loan
  • Accounting Service Revenue
  • Accounts Receivable
  • Andy Ace, Capital
  • Office Furniture
  • Salary Expense


  1. Determine if the above accounts are assets (A), liabilities (L), owner’s equity (OE), revenue (R), or expense (E) accounts.
  2. Determine individually if the above accounts would appear on a balance sheet (B), income statement (I), statement of owner’s equity (SOE), or cash flow statement (CF).

Question 3

West Coast Ltd.’s board of directors held a board meeting to discuss the 2017 financial results. Later on, the board would release the financial statements to its shareholders. One particular topic that they discussed is detailed below.

Company president, Tony Edwards, stated that 2017 was not a successful year financially. With expenses exceeding revenues, West Coast Ltd. would have to report a large loss in 2017, adding to the company’s last 5 years of losses reported. Since another year of losses would not satisfy the company’s shareholders,Tony Edwards suggestion that,for a limited time only, he personally could transfer shares, which he bought in 2012 for $ 1 million and are now worth $ 10 million, to West Coast Ltd. to increase the value of West Coast Ltd.’s balance sheet. The president then added that the chief financial officer, Tina Brown, could eliminate $ 1 million in expenses. Then, West Coast Ltd. could go to the bank for refinancing.

Tina Brown disagreed with the president’s recommendations, stating that generally accepted accounting principles would not allow it.


  1. What is the basic ethical issue in the above discussion?
  2. How do the president’s recommendations violate generally accepted accounting principles?

Question 4

Jeff Ground is the manager/owner of a landscaping business named Ground Rules. The following summarized Ground Rules’ financial position on October 01, 2018:

Accounts                                                         Accounts         Owner’s

Cash    +          Receivable       Supplies  +      Land    +          Payable  +       Equity

Bal.      35,000             20,000                                     100,000           45,000             110,000

Ground Rules transacted the following during October 2018:

  1. Jeff Ground received a $ 10,000 inheritance cheque,and he deposited the cheque into Ground Rules’ bank account.
  2. Ground Rules collected $ 15,000 of its accounts receivable opening balance.
  3. Ground Rules paid the opening balance of its accounts payable.
  4. Ground Rules did some landscaping for a client and invoiced the client $ 25,000.
  5. Ground Rules purchased $ 7,000 supplies on account.
  6. Ground Rules incurred the following business expenses:
    • Paid $ 5,000 for equipment rental during October 2018
    • Paid $ 3,000 for truck repairs during October 2018
  7. Ground Rules received $ 10,000 cash for yard work done on a huge job site.
  8. Jeff Ground needed a vacation, so he withdrew $ 4,000 from Ground Rules’ bank account.
  9. Jeff Ground returned from his vacation. As he only used $ 2,000 of the $ 4,000 vacation money that he withdrew from the business, he deposited the remaining $ 2,000 into Ground Rules’ bank account.


  1. Complete the transaction sheet for Ground Rules using Exhibit 1-11, Panel B: Analysis of Transactions from page 20 in your textbook as an example.
  2. Prepare Ground Rules’ income statement at October 31, 2018.
  3. Prepare Ground Rules’ statement of owner’s equity and balance sheet at October 31, 2018.

Question 5

Accountant and owner of Quick Renovations, C. Cloud had to go out of town to inspect a job site. Thus, he asked his cousin, Joseph Jordan, to prepare Quick Renovations’ December 31, 2018 balance sheet. Joseph Jordan had no knowledge of accounting, but he did know that the balance sheet had to balance; therefore, in order to accomplish this, he had to use a plugged figure for owner’s equity. The other accounts have the correct balances, but the totals may not be correct.


Prepare the correct December 31, 2018 balance sheet of Quick Renovations.


Janet Jones is a professional gym instructor. She started her own business, Janet’s Gym, a proprietorship, in 2014. Consider the following facts, as of December 31, 2018:

  1. Janet’s Gym owned a small gym, which it acquired for $ 600,000 in 2018; the land was worth $ 500,000, and the building was worth $ 100,000. The business took out a $ 520,000 mortgage, and Janet Jones contributed the remaining $ 80,000 cash to buy the property.
  2. In 2018, Janet’s Gym spent $ 15,000 to acquire a gym franchise, Gym to Go.
  3. Janet Jones had $ 15,000 in the business bank account and $ 7,000 in her personal bank account.
  4. Janet Jones owed $ 1,900 on her personal MasterCard.
  5. Janet’s Gym acquired $ 10,000 in gym equipment on December 15, 2018: Janet’s Gym put a down payment of $ 2,000 and was going to pay the remaining balance in January, 2019.
  6. Janet’s Gym had $ 400 in office supplies on hand at December 31, 2018.
  7. Janet Jones bought a condo in 2016 for $ 400,000. At December 31, 2018, her mortgage on the condo was $ 300,000.


  1. Janet’s Gym was researching liability exposure. What advice can you provide to Janet’s Gym?
  2. What items above would not appear on the financial statements of Janet’s Gym?
  3. Prepare the December 31, 2018 balance sheet of Janet’s Gym.

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