Theory Base of Accounting Test - 66

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.

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

Revenue and expenses are recorded only when they are recognized as per the accrual basis of accounting. This method requires recognizing revenue when it is earned (regardless of when cash is received) and recognizing expenses when they are incurred (regardless of when cash is paid). The accrual basis provides a more accurate depiction of a company's financial position and performance by matching revenues with their related expenses in the same accounting period.

The materiality principle dictates that in financial reporting, only information deemed significant enough to influence users' decisions should be disclosed. This involves setting a threshold, beyond which items are considered material and necessitate disclosure, ensuring clarity and relevance in financial statements.

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.

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.

If the benefits of an expenditure are expected to extend beyond one accounting period, it should be classified as an asset, representing future economic benefits that the company controls as a result of past transactions.

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.

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.

The consistency principle requires that a company uses the same accounting methods and procedures from one accounting period to the next to provide comparability between financial statements.