A company records the receipt of cash in exchange for merchandise delivered to a

Question

A company records the receipt of cash in exchange for merchandise delivered to a customer as a deposit liability because the customer has the right to return the goods any time.

Provide the letter corresponding to the SINGLE, PRIMARY assumption, principle, or qualitative characteristic that corresponds with the above statement

A. Periodicity assumption

B. Monetary unit assumption

C. Going concern assumption

D. Economic entity assumption

E. Full disclosure principle

F. Revenue recognition principle

G. Historical cost principle

H. Matching principle

I. Representational faithfulness

J. Comparability (incl. Consistency)

K. Relevance

L. Materiality

M. Conservatism

Explanation / Answer

A company records the receipt of cash in exchange for merchandise delivered to a customer as a deposit liability because the customer has the right to return the goods any time.

EXPLANATION ---

The above explanation relates to the concept of “CONSERVATISM” or we can say prudence concept in other words in accounting.

Under this concept company makes a policy of anticipating possible future losses but not future gains. It helps companies to play safe as this policy tends to understate net assets and net income.

In above example the company is recording it in deposit liability because of conservatism principle as there is a chance of return of goods by customer so the revenue is not yet recognised.

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