Theory Base of Accounting Test - 5

The entity or unit is trearted differnetly and distinct from its owners. And we record transactions from the view point of the business. That is why we record capital contributed by the owner in the liability side in the balance sheet and drawings which are personal withdrawls by the owner is deducted from the capital as it is as good as payment is done to the owner.

according to money measurement principle event or transactions which can be measured in the terms of money with a definite accuracy should be recorded in the books of accounts. Thus quality of labour which cannot be measured cannot be recorded in the books of accounts.

As per Going concern concept it is assumed that the business will continue to exist for a long period in the future. The transctions are recorded in the books of the business on the assumption that it is a continuing enterprise, unless otherwise.

As the busniess is intended to continue indefinitely for a long period, the true results of the business operations can be ascertained only when the busines is completely wound up. But ascertainement of profit after a very long period will be of little use to the proprietors. The users of financial statements need to know the results of the business at ferquent intervals. Thus, the entire life of the firm is divided into time-intervals for the measurement of the profits.

According to Historical cost concept, assets are recorded in the books of accounts at the price at which it was acquired. As market value keeps changing and it is very difficult and costly affair to determine the market value of the assets every year. therefor assets are recorded at cost and not market value whether low or high.

Single Entry System of book- keeping in which, as a rule, only records of cash and of personal accounts are maintained; it is always incomplete double entry system. That is why it ignores Dual aspect of double entry accounting system.

according to Prudence when there are different alternatives for recording a transaction, the one having least favorable immediate effecr on profits or capital should be adopted. Thus we record closing stock at Cost price or market price whichever is lower. As we have to make provision for all anticipated losses but not record anticipated profits.

Provision is made for bad and doubtful debts

Over a period of time, a number of Generally Accepted Accounting Principles (GAAP) in the form of concepts and conventions have been developed and accepted to bring comparibility and uniformity in the financial statments of various business entities.

Only those transactions and events are recorded in the accounting which are capable of being expressed in terms of money. An event, even though it may be very important for the business, will not be recorded in the books of the business unless its effect can be measured in  terms of money with a fair degree of accuracy. Thus appointment of Manager though important will not be recorded in the books of accounts as it cannot be measured in terms of money.