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CS Executive · Corporate Accounting and Financial Management · Introduction to Accounting

Mehta Textiles Ltd. purchased a machine for use in its factory for 10 years. The accountant recorded it as an asset in the books instead of charging the whole cost as an expense of the year of purchase, because the firm is expected to continue operating for the foreseeable future. Which accounting assumption supports this treatment?

The going concern assumption supports it. Since the company is expected to keep operating for the foreseeable future, the machine's cost is shown as an asset and allocated over its useful life, rather than being fully expensed in the year of purchase.

  1. AGoing concernCorrect
  2. BAccrual
  3. CConsistency
  4. DMateriality

Explanation

Under the going concern assumption, the entity is expected to continue in operation for the foreseeable future, so the cost of a long-lived asset is spread over its useful life through depreciation rather than written off at once. Accrual relates to recording items when they arise, not when cash moves, and does not explain the deferral of the machine's cost.

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