Chapter 2, Problem 2.1E

Matching Definitions with Terms

Match each definition with its related term by entering the appropriate letter in the space provided. There should be only one definition per term (that is. there are more definitions than terms).

To determine

Match the given term with appropriate definition.

Explanation of Solution

Match the given definition with appropriate definition as follows:

Serial Number	Term	Definition
1.	Transaction	E. An exchange between an entity and other parties
2.	Going concern assumption	F. The concept that businesses will operate into the foreseeable future.
3.	Balance sheet	B. Reports assets, liabilities and stockholder’s equity.
4.	Liabilities	P. Probable debts or obligation to be settled with assets or services
5.	$\text{Assets = }\left(\begin{array}{l}\text{Liabilities + }\\ \text{Shareholders Equity}\end{array}\right)$	K. The fundamental accounting model
6.	Notes payable	M. The account that is credited when money is borrowed form a bank.
7.	Common stock	L. Represents the shares issued at par value.
8.	Historical cost	H. The concept that assets should be recorded at the amount paid on the exchange date.
9.	Account	I. A standardized format used to accumulate data about each item reported on financial statement.
10.	Dual effect	Q. Every transaction has at least two effects on the accounting equation.
11.	Retained earnings	O. Cumulative earnings of a company that are not distributed to the owners.
12.	Current assets	A. Economic resources to be used or turned into cash within one year.
13.	Separate entity assumption	C. Business transaction are accounted for the separately from the transactions of the owner.
14.	Par value	X. A general amount per share
15.	Debits	D. Increase assets; decrease liabilities and stockholder’s equity.
16.	Accounts receivable	J. Amount owed from customers
17.	Monetary unit assumption	N. The concept that states that accounting information should be measured and reported in the national monetary unit without adjustment for changes in purchasing power.
18.	Faithful representation	W. Useful information should be complete, neutral and free from error.
19.	Relevance	T. Useful information has predictive and feedback value.
20.	Stockholder’s equity	R. Financing provided by owner and by business operations.

Table (1)

Justification:

• A transaction is a business event which has a monetary value that creates an impact on the business. The process of identifying the economic effects of each transaction of the business is known as transaction analysis.
• The going concern assumption emphasizes on the longevity of the company’s life. This assumption is based on the anticipation of the indefinite continuation of the business operation. This is relevant to many accounting principles like historical cost principle.
• Business is considered as an individual entity, as per the separate entity assumption, hence it indicates the business and personal record keeping should be maintained separately.
• Balance sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date.
• Liability is an obligation of the business to pay to the creditors in future for the goods and services purchased on account or any other financial benefit received.
• Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners.
• Notes payable refers to a written promise for the amounts to be paid within a stipulated period of time. This written promise is issued by a creditor to borrower. Notes payable is a liability of a business.
• The amount invested in the business by an investor in exchange of shares, and receives a return or share of profit from the profits earned by the business, is known as common stock.
• Historical cost principle insists on recording the assets, on its original cost in the balance sheet; hence it indicates that the fair value, changes subsequent to purchases is not recorded in the books of accounts.
• Account is the basic record that reports all changes in the value of particular assets, liabilities and stockholder’s equity, and it is the basic summary device of accounting.
• Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.
• Under dual aspect principle, every financial transaction has at least two effect, either income statement or balance sheet.
• An asset is a resource that is owned, and controlled by the company to generate a future economic benefit. Current asset is the resource which the company can be liquidated within a period of one year.
• Business is considered as an individual entity, as per the separate entity assumption, hence it indicates the business and personal record keeping should be maintained separately.
• It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.
• Debit - all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Accounts receivable is an asset of the business, which refers to the amount which the company would receive in near future for the goods or services provided; hence it is shown in the balance sheet.
• Monetary unit assumption is based on the assumption, that the dollar is stable and will have a purchasing power for a long term; hence it assumes that the dollar is “measuring stick” used to report financial performance.
• The information shared or shown in the financial statement should be fair and agree with the original facts. The important components of faithful representation are completeness, neutrality, and free from error.
• The financial statement prepared should indicate the affirmatory value or supporting value. The important components of relevant information are predictive value, confirmatory value, and materiality.
• Stockholders equity refers to the right the owner possesses over the resources of the business. Common stock and the retained earnings are the components of the Stockholders Equity.