Caren Cosmos is the world's most popular soft rock folk singer. She sold t-shirts online last year and made $7,000. The money from these sales went directly into her personal banking account which she used for her personal needs. Which key accounting assumption did Caren ignore?

Caren Cosmos is the world's most popular soft rock folk singer. She sold t-shirts online last year and made $7,000. The money from these sales went directly into her personal banking account which she used for her personal needs. Which key accounting assumption did Caren ignore?

• A. Going Concern
• B. Entity Assumption
• C. Accrual Basis Assumption
• D. Periodicity Assumption

Answer: (B)

The Entity Assumption is being tested. It requires that a business and its owner be treated as separate economic units, so the business’s financial records reflect only business transactions. By depositing sales revenue into her personal bank account used for personal needs, Caren blended personal finances with the business, which means the business is not being kept separate. In proper accounting, the sales cash should stay in the business’s books, and any owner withdrawals would be recorded separately as draws or equity changes. This separation ensures the financial statements accurately show the business’s performance and position. The other concepts don’t address mixing personal and business funds: going concern relates to whether the business will continue operating, periodicity to the reporting time frame, and accrual basis to when revenues and expenses are recognized rather than when cash moves.

The Entity Assumption is being tested. It requires that a business and its owner be treated as separate economic units, so the business’s financial records reflect only business transactions.

By depositing sales revenue into her personal bank account used for personal needs, Caren blended personal finances with the business, which means the business is not being kept separate. In proper accounting, the sales cash should stay in the business’s books, and any owner withdrawals would be recorded separately as draws or equity changes. This separation ensures the financial statements accurately show the business’s performance and position.

The other concepts don’t address mixing personal and business funds: going concern relates to whether the business will continue operating, periodicity to the reporting time frame, and accrual basis to when revenues and expenses are recognized rather than when cash moves.