Accounting Equation Effects Test 12

According to matching concepts, while determining the net income from business, all costs which are applicable to revenue of the period should be charged against that revenue.

Money measurement postulate assumes that the value of money will remain the same in different periods. Though there is drastic change in purchasing power of money, the assets purchased at different times will be shown at the amount paid for them.

Accounting Equation :

Accounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared, to know whether it has earned profits or incurred losses during that period and what exactly is the position of its assets and liabilities at the end of that period.

All transactions are recorded in the books of accounts on the basis of the dual-aspect concept. Thus, every transaction affects at least two accounts in opposite directions. There can be no transactions in a business that affect only one account or have only one aspect because the double-entry system of accounting is followed while recording the transactions in the books of accounts. For example, if furniture is purchased for cash, the transaction will affect two accounts, i.e. Furniture A/c, as furniture is increased and Cash A/c as cash is decreased.

The convention of conservatism will have the effect of understatement of assets. According to conservatism principle all the anticipated losses and expenses should be taken into account in advance, but all the anticipated incomes should not be recorded in advance. The closing stock is valued at cost or net realizable value which ever is lower, thereby understating the assets and overstating the liabilities. 

The principle of full disclosure requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes. 

This is to enable the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take informed decisions.

Hence, the market value of investments is shown in the balance sheet as a footnote according to the disclosure concept.

Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction.

The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits. 

The best example for this is the accounting equation.

Assets = Liabilities + Capital. 

This proves that, everything the firm owns, it owns out to somebody.

The accounting information provided by the financial statements would be useful in drawing conclusions regarding the working of an enterprise only when it allows comparisons over a period of time as well as with the working of other enterprises. 

A firm may hold stock which is heavily in demand. Consistently, the market value of this stock may be increased. Normal accounting procedure is to ignore this because of conservatism principle.