Theory Base of Accounting Test - 4

According to objectivity concept, the accounting transaction should be recorded in an objective manner and should be free from personal bias. Hence, every transaction should be verified with original document or voucher such as cash receipt for cash purchase or invoice and delivery challan for credit purchase.

According to conservatism concept, the conservatism concept takes into consideration all prospective losses but leaves all prospective profits. The principle of conservatism is “anticipate no profit and provide for all possible losses”.

For example, valuation of closing stock, creating provision of discount on debtors and writing off intangible assets.

IFRS stands for International Financial Reporting Standards. IFRS are developed by International Accounting Standards Board (IASB) to bring uniformity by using single accounting standards.

The accounting principles are not rigid but flexible. Whenever a situation arises which requires solution, accountants arrive at a reasonable decision which becomes the accepted accounting principles.

An enterprise is viewed as having an indefinite life because the going concern assumes that the business will run its operation for a foreseeable period of time and there is no intention to close the business.

Double entry system is based on the dual aspect concept because it has both the aspects of transactions i.e. debit and credit. Debit aspect is known as the receiving aspect or incoming aspect or expenses/loss aspect. The credit aspect is known as giving aspect or outgoing aspect or income/gain aspect. The double entry system states that for every debit, there is always an equal credit.

According to the accounting period, the business life is divided into smaller periods so that it becomes easy to measure the performance of the business on regular intervals. Information such as operating result and concern over financial position of the business is prepared for different users to take decisions on the same. It is necessary to prepare financial statement for every accounting period which is generally considered a year or 52 weeks.

Therefore, according to accounting period concept, the performance of the business can be measured on regular intervals.

Business entity concept assumes that business has a distinct entity from its owners, creditors and others. Therefore, it implies that all the business transactions are recorded from the business point of view.

According to money measurement concept, the transactions which cannot be expressed in terms of money are not recorded in the books of account. The potentials of human resource cannot be expressed in terms of money, and hence is not disclosed in the balance sheet.

According to full disclosure concept, all material and relavant facts of financial performance of an enterprise must be fully disclosed in the financial statement. This financial statement is the means of communicating financial information to different users to take financial decisions.