Theory Base of Accounting Test - 42

The convention of conservatism mean that the convention of caution, or the policy of playing safe. This principle requires that in the situation of uncertainty and doubt, the business transactions should be recorded in such a manner that the profits and assets are not overstated and losses and liabilities are not understated. The following are some examples:

1. Closing stock is valued at cost price or Net realisable value, whichever is lower.

2. Joint life insurance policy  is shown only at surrender value as against the amount paid.

3. Provision for doubtful debt is created in anticipation of bad debts etc.

4. Provision for pending law suit against the firm, which may either be decided in its favour.

Materiality Concept

Going Concern Concept states that the business will not stop in near future. Therefore, fixed assets are depreciated over their useful life rather than over a shorter period on the expectation of early liquidation as per going concern concept.

Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction.

The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.
The best application of this aspect is the Accounting Equation, i.e., Assets = Liabilities + Capital.

Business Entity Concept states that the business man is separate from the business. Thus, the amount invested by the owner in the business is known as the capital and is liability for the business. This is a universal to all the forms of business whether it is sole proprietorship, partnership firm or a joint stock company.

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. 

An accounting year is a period of time, usually 12, during which businesses calculate their accounts and organize their financial activities. The accounting year, also known as the accounting period, occurs usually on any date other than January 1st to December 31st and its also called a financial year and the calendar year.

Income is measured as per the matching Concept. It states that only those incomes should be recorded in the books of accounts that are matched with the respective expenses and that belongs to the current accounting year.

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.

For example, Provision for doubtful debt is created in anticipation of bad debts etc.

In India, Standards of Accounting is issued by the Institute of Chartered Accountants of India (ICAI). 

The Council of the Institute of Chartered Accountants of India constituted Accounting Standards Board (ASB) on 21st April, 1977 recognising the need for Accounting Standards in India.

The Council of the Institute of Chartered Accountants of India has so far issued thirty two accounting standards.