Theory Base of Accounting Test - 6

According to prudence concept, all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealised gains should be ignored. in other words it is the policy of playing safe. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty.

According to this concept, business is treated as a unit separate and distinct from its owners, creditors, managers, and others. In other words, the owner of a business is always considered as distinct and separate from the business he owns. business unit should have a completely seprate set of books and we have to record business transaction's from firm's point of view and not from the point of view of the proprietor.

The IFRS refers to the Interantional Financial Reporting Standards' which are issued by IASB i.e International Accounting Standard Board.

Dual Aspect concept states that every business transaction is recorded as having a dual aspect. Thus everything firm owns i.e. assets of the firm will also be owed out to somebody that may be liabilities and capital. Thus Assets= capital + liabilities.

Consistency concept states that accounting principlea and methods should remain consistent from one year to another. These should not change from year to year, in order to enable the management to compare the Profit & loass account and Balance Sheet of different periods and draw important conclusion about working of the enterprise. Thus Straight Line method used in one year should be followed next year also.

According to conservatism all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealized gains should be ignored. Accordingly, Closing stock is valued at cost price or realisable value whichever is less. And thus increased market value is never taken into considersation for valuing stock.

Revenue regcognition means profit should be considered only when realised. And according to the Law the revenue is earned only when goods are transferred. No anticipated profits should be taken credit of. Thus, if a firm receives and order for goods, it will not be included in the sales figure.

An event though may be very important for the business, will not be recorded in the books of business unless its effect can be measured in terms of money with a fair degree of accuracy. Thus the above transaction cannot be recorded in the books of accounts.

Money is the only measurement which enables various things of diverse nature to be added up together and dealt with. Thus, in above example Rs 120000/- will be recorded in the books and not 12 television sets.

The term IFRS refers to the ' International Financial Reporting Standards' issued by International Accounting Standard Board (IASB).