Theory Base of Accounting Test - 11

According to revenue recognition principle when the property in goods is transferred to the owner that time sale is taken into effect. So when goods are invoiced to the purchaser that time we say the ownership has been transferred and thus we record the sale at the time of invoicing.

According to prudence or conservatism principle all anticipated losses should be accounted for therefore the closing stock is valued at cost price or market price whichever is lower , so that if the market price is lower than the cost price then the anticipated loss can be recorded in the books.

According to prudence all anticipated profits should be ignored and all anticipated losses should be accounted for. Thus by recording the anticipated profit on sale of goods which has till now not materialised is violating prudence concept of the accounting and showing inflated profits in the business.

According to full disclosure principle, the financial statements must disclose all the material, relevant and relaible information whihc may be more beneficial to the shareholders, creditors, bankers , etc. The loss of machinery should be disclosed in the books of accounts. and company has not disclosed the same. So it is not following full disclosure principle.

Cost of machinery is recorded at the price paid for the purchase as well as any cost incurred for its installation of the machinery. Therefore total cost of machinery at which it should be recorded is Rs 200000+Rs10000= Rs 210000/-.

As per accrual concept expenses should be accounted for when it is incurred whether paid or not . Therefore salaries amounting to Rs 20000/-. should be recorded in the books for the month of march 2013 though it is paid or not. Therefore, owner is not correct in not recording the expenses.

The method of valuing fixed assets at their cost and not at market value is the underlying principle of cost concept . In the above case Manish is wrong in recording the value of land a price lower than its costs as he is not selling the same in near future. He has purchased the land for construction of the building . He should record the land in the books at the cost price i.e Rs 18 lakhs.

According to Consistency assumption if a particular method is used in one year, same method should be used in the next year in order to maintain consistenncy in the presentation of the accounts. Thus in the above question when firm adopts one method in the previous year and the other method in next year , so they are violating consistency assumption.

According to accrual concept Revenue is recognised as they are earned whether money is received or not in the current financial year. Thus we will recognise the revenue in the month of february though the money is received in the month of march.

Insurance Premium Paid for a month = Rs 1200/12= Rs 100 per month and when books are closed on 31st march every year so cureent year expenses will be for 9 months i.e. from july to march = Rs 100*9= Rs 900 and prepaid will be for 3 months i.e. from april to june = 100*3= Rs 300/-.