Theory Base of Accounting Test - 2

Accrual basis of accounting is the practice of recording revenues when they are earned and recording expenses when they are incurred. It means that revenues are recorded when they are received or receivable and expenses are recorded when they are paid or payable. Thus, all cash and non-cash transactions are recorded in the books of accounts.

Going concern concept assumes that the business will run its operation for a longer period of time. Hence, the transactions are recorded in the books of account assuming that the business would not be liquidated in the foreseeable future.

Only small business organisation can follow single entry system because it is an incomplete system of maintaining records of financial transaction. It does not record the two effects (i.e. debit and credit) of every transaction. It maintains only personal account and cash book and ignores all the other accounts. Under this system, the accounts maintained are not complete, and therefore are not reliable.

The fundamental accounting equation based on the dual aspect concept is as follows:

Asset = Capital + Liability

Or

Capital = Assets - Liability

Revenues from cash sales i.e. inflow of cash = Rs.2,00,000

Less: Expenses i.e. outflow of cash (Rs.90,000 - Rs.10,000) = Rs.80,000

Net income = Rs.1,20,000

Here, credit sales and outstanding expenses will not be taken into account.

According to money measurement concept, only those business transactions and events which can be expressed in terms of money are recorded in the books of account. The transactions which cannot be expressed in terms of money are not recorded in the books of accounts.

According to the accrual concept, the transactions are recorded in the books at the time when they are entered into.Thus, revenues and costs are recognised in the period in which they occur rather than when they are paid.

The fundamental accounting assumptions are

Going concern concept/assumption

Consistency concept/ assumption

Accrual concept/ assumption

Conservatism is a basic concept/ principle of accounting.

Money measurement concept records only those business transactions and events which can be expressed in terms of money. The transactions which cannot be expressed in terms of money are not recorded in the books of accounts.

Here, a manager’s appointment cannot be expressed in term of money, and hence it is not recorded.

According to the consistency concept, accounting policies and practices once adopted should be consistently followed. Hence, the personal bias gets eliminated through the practice of consistency.