Stuart Allen Company manufactures computer hardware. The president of the company bought a new car as a gift for his daughter and paid for it using cash from the business. Since the company

paid for the car, it was recorded in its books as an asset. Which of the following concepts or

principles of accounting did the company violate?

A) monetary unit assumption

B) going concern assumption

C) economic entity assumption

D) cost principle

C) economic entity assumption

C. Economic entity assumption

Explanation:

Monetary unit assumption: As per this assumption, US dollar is considered to be a king. The accountants are forbidden of logging transactions in any other currency. It also grant accountants permission to ignore inflation when reviewing the statements considering that purchasing power of a dollar remains unchanged.

Going concern assumption: As per this assumption, a firm will continue its operations for the foreseeable years. Irrespective of the fact, whether the owner is alive or not, a firm may continue to operate unless dissolved. In case of bankruptcy, a firm will discontinue its operations.

Cost principle: As per this principle, an asset should be recorded at the acquired price. The acquired price is the price at which the asset was originally purchased i. e. the historical cost of an asset.

Economic entity: Each firm or organization is an economic entity and has a separate artificial identity from its owner or stakeholders. So, only the transactions pertaining to business are recorded and personal expenses are excluded from the financial statements of the firm.

Thus, the personal expense of president of the company should not have been recorded in the financial statements of the company.