Theory Base of Accounting Test - 13

As per accounting period concept all the expenses should be classified in capital and revenue expenditure so that proper allocation can be done. ANy expenses whose benefits will be available for more than one year are classifed as capital expenditure i.e. expenditure on fixed assets and any expenses whose benefit will expire within one year are revenue expenses i.e. salaries for the month, etc.

According to money measurement concept transactions which can be measured in monetary terms with definite accuracy should only be recorded in the books of accounts. Thus any event which may be important for business but cannot be measured in monetary terms will not be recorded in the books of accounts.

According to consistency principle method or treatment followed in one year for any transaction, the same should be followed in the subsequent years for the same transactions so that there is uniformity in presentation of data.

According to conservatism or prudence all anticipated profits should be ignored and all anticipated losses should be accounted for. Thus accordingly Cloasing stock should be valued at cost price or market price whichever is lower. If market price is higher, then we ignore market price and recor at cost i.e.anticipated profits are ignored and if market price is lower we record at market price i.e anticipated losses are accounted for.

The financial statements must disclose all the material, relevant and relaible information which may be more beneficial to the shareholders, creditors, bankers, etc.

In order to calculate tax on the income earned by the firm the Financial acocunting period is taken from 1st April to 31st March . every year.

According to dual concept every debit has its credit to the extent of same amount. Thus it has resultaed that at any point of time the assets of any entity must be equal to total of owner's equity and outsiders' liabilites. Thus, it emphasises that the proprietory claim is the balance afetr providing for outsider's claims against assets of the business.

According to money measurement concept only events and transactions whihc can be measured in terms of money can be recorded in the books . For example manager appointed thoughimportatnt event cannot be recorded in the books of accounts , though salary paid to manager will be recoreded as it can be measured in the books of accounts.

According to business entity concept a business entity is separate and distinct from its owner and transaction are recorded from the point of view of business. Therefore capital invested by the owner becomes laibility for the business and owner becomes creditor of the business in accounting terms.Because the amount invested by owner if not then would have been taken from outside liability that is why owner is treated as creditor of the business.

All the fixed assets should be recorded at the cost price or the purchase price plus any cost incurred on its insatllation and to make it ready for commercial production should also be added to the cost of the fixed assets.