Theory Base of Accounting Test - 28

Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity capital as an obligation and a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet. In other words, the capital means the interest of owner or owners in the assets of the business firm.

The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use.

For example, an old plant was purchased for Rs. 50 lakh, which is into the business of manufacturing detergent powder. The following were the other expenses incurred for its installation:

1. Transporting the plant to the factory site- Rs. 10,000 

2. Repairs for bringing the plant into running position- Rs. 15,000

3. Installation- Rs. 25,000 

The total amount at which the plant will be recorded in the books of account would be the sum of all these, i.e. Rs. 50,50,000.

The accounting information provided by the financial statements would be useful in drawing conclusions regarding the working of an enterprise only when it allows comparisons over a period of time as well as with the working of other enterprises. 

The concept of going concern assumes that a business firm would continue to carry out its operations indefinitely, i.e. for a fairly long period of time and would not be liquidated in the foreseeable future. 

This is an important assumption of accounting as it provides the very basis for showing the value of assets in the balance sheet. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be low fire-sale prices.

A transaction is a business event that has a monetary impact on an entity's financial statements, and is recorded as an entry in its accounting records. 

The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe. The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated. 

The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.

The concept of going concern assumes that a business firm would continue to carry out its operations indefinitely, i.e. for a fairly long period of time and would not be liquidated in the foreseeable future. 

This is an important assumption of accounting as it provides the very basis for showing the value of assets in the balance sheet. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be low fire-sale prices.

The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. 

The business and the owner are considered as separate entities to this effect capital is regarded as liability of the business as the business is considered as an individual who will owe back whatever has been invested on it, generally in form of capital.