Which of the following is an application of the systematic and rational allocation principle

 What are the four recognition principles?

1.Asset recognition principle

2.Liability recognition principle

3.Income recognition principle

4.Expense recognition principle

 Asset recognition principle.

An asset is recognized in the statement of financial position when it is probable that future economic

benefits will flow to the entity and the asset has a cost or value that can be measured reliably. Thus, two

conditions must be present for the recognition of an asset:

a) It is probable that future economic benefits will flow to the entity.

b)The cost or value of the asset can be measured reliably.

 What is the meaning of future economic benefit?

The future economic benefit embodied in an asset is the potential to contribute directly or indirectly to the

flow of cash and cash equivalents to the entity.

The potential may be a productive one that is part of the operating activities of the entity.

It may also take the form of convertibility into cash or cash equivalents or a capability to reduce cash outflows, such

as when an alternative manufacturing process lowers the costs of production.

 What is the cost principle?

Inherent in asset recognition is the cost principle.

This principle requires that assets shall be recorded initially at original acquisition cost.

The initial cost may be carried without change, may be changed by depreciation, amortization or write-off, or

may be shifted to other categories ag in the cage of raw materials being converted into finished goods.

In other words, the financial statements shall be based on historical cost rather than market value.

The reason is that cost is objective and therefore verifiable while market value is subjective.

 How much is cost?

In a cash transaction, cost is equivalent to the cash payment.

Thus if an equipment is acquired for P100,000 cash, the cost of the equipment is P 100,000.

In a noncash or an exchange transaction, the cost is equal to the following in the order of priority:

a) Fair value of asset given

b)Fair value of asset received

c) Carrying amount of asset given

 Explain the liability recognition principle.

A liability is recognized in the Statement of financial position when it is probable that an outflow of resources

embodying economic benefits will be required for the settlement of a present obligation and the amount of the

obligation can be measured reliably.

Thus, two conditions must be present for recognition of a liability:

a) It is probable that an outflow of economic benefits will be required for the settlement of a present

obligation.

b)The amount of obligation can be measured reliably.

 Explain "present obligation" as an essential characteristic for the recognition of a liability.

An essential characteristic of a liability is that the entity has a present obligation which may be legal or

constructive.

What is systematic and rational allocation principle?

Which of the following is expenses under the principle of systematic and rational allocation?

Which of the following is an example of expense recognition principle of associating cause and effect?

Which of the following principles best describes the rationale for matching distribution costs and administrative expenses with revenue of the current period?