State BPA Fundamental Accounting Practice Exam

Performing adjusting entries to update asset account balances is an application of which accounting concept?

1. Matching Expenses with Revenues

2. Historical Cost Principle

3. The Economic Entity Assumption

4. Full Disclosure Principle

The correct answer is: Matching Expenses with Revenues

Performing adjusting entries to update asset account balances is primarily aligned with the concept of matching expenses with revenues. This concept ensures that expenses incurred to generate revenues are recorded in the same period as the revenues they helped to produce. By making these adjustments, the financial statements accurately reflect the financial performance and position of the entity for a given accounting period. When asset accounts, such as prepaid expenses or accumulated depreciation, are updated through adjusting entries, it is often to ensure that expenses are recognized in the correct accounting period, aligning them with the related revenues. This is crucial for providing a true and fair view of the company's profitability and financial standing. Other accounting concepts have distinct focuses; for instance, the historical cost principle relates to recording assets at their purchase price rather than current market value, which does not directly pertain to the purpose of adjusting entries. The economic entity assumption revolves around keeping personal and business finances separate, while the full disclosure principle emphasizes transparency and completeness in financial reporting. None of these concepts specifically address the necessity for adjusting entries to match revenues with the related expenses, which is why the matching concept is the most fitting choice in this scenario.