Accounting Equation Effects Test 23

The convention of conservatism mean that the convention of caution, or the policy of playing safe. This principle requires that in the situation of uncertainty and doubt, the business transactions should be recorded in such a manner that the profits and assets are not overstated and losses and liabilities are not understated. The following are some examples:

1. Closing stock is valued at cost price or net realisable value, whichever is lower.

2. Joint life insurance policy is shown only at surrender value as against the amount paid.

3. Provision for doubtful debt is created in anticipation of bad debts etc.

4. Provision for pending law suit against the firm, which may either be decided in its favour.

GAAP (generally accepted accounting principles) is a collection of commonly-followed accounting rules and standards for financial reporting. The acronym is pronounced "gap." GAAP specifications include definitions of concepts and principles, as well as industry-specific rules.

Materiality Concept states that only those information should be stated in the financial statement which have an impact on the decision making of the users. Here, paise will not have any impact on the decision making of the users therefore, it is an a material information and can be omitted.

Here, Business Entity Concept states that the business is separate from its owner and the amount which the businessman has invested into the business is termed as capital and Such capital is a liability for the business.
When the owner withdraws some money from the business it is known drawings.
Therefore, both business and sole proprietor need to have separate accounts so, the Entity concept is violated when a sole proprietor decided to use the same bank account for his personal affairs as for his business..

Separate business entity concept defines that owner and the business are two separate legal entities in the eyes of law. 

The concept of going concern assumes that a business firm would continue to carry out its operations indefinitely, i.e. for a fairly long period of time and would not be liquidated in the foreseeable future. 

This is an important assumption of accounting as it provides the very basis for showing the value of assets in the balance sheet. 

Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be low fire-sale prices.

Dual aspect is the foundation or basic principle of accounting. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places.

The duality principle is commonly expressed in terms of fundamental Accounting Equation, which is as follows :

Assets = Liabilities + Capital

In other words, the equation states that the assets of a business are always equal to the claims of owners and the outsiders. The claims also called equity of owners is termed as Capital(owners’ equity) and that of outsiders, as Liabilities(creditors equity). These both combined together form total liabilities. The total liabilities are also called as equities. 

The Matching Concept is the accounting principle which states that the revenues earned during an accounting period should be matched with all the expense incurred during a period. 
Therefore, Assigning revenues to the accounting period in which the goods were delivered or the services performed and expenses to the accounting period in which they were used to produce revenue are known as the Matching rule.

Going concern concept states that the operations of the business will not close in near future and business was continue. The valuation of a promise to receive cash in the future at present value on the financial statements of a business entity is valid by Going concern.

Matching concept of accounting defines that all the expenses need to be recorded in the books of account for the same period against which the revenue is recorded in the books.