Theory Base of Accounting Test - 7

Only those transactions and events are recorded in accounting which are capable of being expressed in terms of money according to money measurement concept. An event which may be importatnt for the business, eq competitor has launched a better product in the market, will not be recorded in the books of the business unless its effect can be measured in terms of moneywith a fair degree of accuracy. Thus, it ignores qualitative aspect of the business.

Financial Statements refer to such statemnets which report the profitability and the financial position of the business at the end of accounting period. And they also hep in the comparison of results from time to time.

Accounting equation signifies that the aseets of a business are always equal to the total of capital and liabilities.

According to Revenue Recognition Concept the revenue is earned only when the goods are transferred. It means that profit is deemed to have accrued when property in goods passes to buyer. Thus accounting should take into consideration of profits only when the same have been realised and no anticipated profit should be recorded in the books. Thus order received is not any generation of reveue.

In cash basis of accounting only amount received or paid in cash are recorded in the books of accounts. Outstanding expenses are the expenses which are due but not paid, so this will not be recorded in the books of accounts following cash basis of accounting.

Under cash basisi of accounting incomes are not recorded unless they are received in cash. Expenses are only recorded when they are ppaid in the cash. No credit transactions are recorded.

This accounting assumption indicates that the revenue is recognized when it is earned and expenses is recognized when obligation if payment arises. We record all expenses or incomes relating to the accounting period when cash has been disbursed or received or not.

According to Comapnies Act, 1956  revenue and costs are recognised as they are earned or incurred ( and not as money is received or paid) and recorded in the financial statements for the periods to which they relate. This concept is called accrual concept.

A need was felt to formulate some guidelines which are universally applicable so that the accounting may serve the useful purpose of those dealing with it . accounting standards are the norms of accounting policies and practices to guide the treatment of transactions and events in the accounting process.

According to business entity concept, the task of measuring income and wealth is undertaken by accounting for an identifiable unit or entity. the Unit or entity so identified is treated different and distinct from its owners.