Theory Base of Accounting Test - 9

Market value of an asset keeps on changing from year to year and it will become tedious and costly affair to clacuate the same every year. So businesses practice the policy of cost concept in which the value of an asset is recorded cost i.e. acquired cost and thus market value becomes irrerelevant, the book value does not signify the market value of goods of the asset.

There are in practice several different methods of calculation or recording of some events in the accounts. The consistency assumption requires that once a particular method of calculation or recording has been decided, the business enterprise will follow the same method for subsequent years for events of same character, to ensure uniformity in accounting processes and policies.

Prudence or conservatism principle states that all the losses should be provided for but we not take credit of anticipated profits. But the above statement is totally opposite and thus completely false.

the concept of materiality states that material details must be given due consideration whereas trivial items should be ignored. Otherwise, accounting information shall be overburned with minute details. The term ' materiality' is relevant e.g. while sending satatement of account to each debtor individually, accuracy upto paise is desiarable but when a statement of total debtors is submitted to top management, the figure may be rounded off to the nearest hundred. And thus the modifying principle will also apply.

According to business entity concept , the unit or entity so identified is treated different and distinct from its owner. And we record the transactions from the point of view of business . so accordingly owner is treated as creditors and any capital contributed by him is liabilty for the suiness. similarly Proprietor's private expenses are treated as drawing, it is as good as withdrawal of capital and Life insurance premium is treated as drawing as it is on the personal life of the owner and business will not receive any benefit when the owner dies it will be received by the family of the owners.That is why all three options are correct.

Periodicity is the preparation of final accounts for the accounting period and financial position of the business is shown at the end of accointing period. Thus, for all purposes like performance evaluation, tax computation, budgetary control, etc the fianancial staements are preapred at a periodical interval are useful and desirable.

According to conservatism principle accountant follows the policy of playing safe, So it removes uncertainty and doubt in favor of undersatting assets and overstating liabilites and expenses like, mainiting proviosn for doubtful debts; showing depreciation but not appreciation ignoring provision of discount on creditors.

Revenue Recognition emphasises that profit should be considered only when realised.It will be realised only when the goods are transferred. it means that profit is deemed to have accrued when property in goods passes to the buyer i.e. when sales are effected.No anticipated profites should be taken credit of.

Going concern concept states the business will continue to exist and carry on its operations for a very long period of time in the future unless there is good evidence to its contrary. Thus we can assume that the business enterprise will not be sold or liquidated in the near future.

Historical concept states the assets purchased should be recorded at the cost price and not market price therefore option a has matching with (ii), Revenue recognition states that revenue is considered only when is realised and not when we assume or when we suppose receive the order for the supply of goods. so b is matched with (i).and full disclosure principle states that the significantly information should be presented fully and completely so that it can used when required.so c is matched with (iii).