Accounting Equation Effects Test 14

The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts. 

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 transaction is a business event that has a monetary impact on an entity's financial statements, and is recorded as an entry in its accounting records. 

The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe. The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated. 

The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.

The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. 

The business and the owner are considered as separate entities to this effect capital is regarded as liability of the business as the business is considered as an individual who will owe back whatever has been invested on it, generally in form of capital. 

The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts. 

The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use.

For example, an old plant was purchased for Rs. 50 lakh, which is into the business of manufacturing detergent powder. The following were the other expenses incurred for its installation:

1. Transporting the plant to the factory site- Rs. 10,000 

2. Repairs for bringing the plant into running position- Rs. 15,000

3. Installation- Rs. 25,000 

The total amount at which the plant will be recorded in the books of account would be the sum of all these, i.e. Rs. 50,50,000.

Amount invested by the owner in his firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity capital is an obligation and a claim on the assets of business. It is, therefore, shown as capital on liabilities side of the balance sheet It refers to the money or money's worth introduced or invested by the proprietor in the business. It is the excess of assets over liabilities.  It is also called as owner's equity.