Accounting Equation Effects Test 27

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. 

Accounting  Equation is defined as:

Amortization of intangible assets means reducing the value of the asset in a systematic manner and charging that value to the revenue of that year. 

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.

Generally accepted accounting principles (GAAP) comprise a set of rules, concepts and guidelines used in preparing financial accounting reports.
These Principles are issued by Financial Accounting Standard Board (FASB).
These principles are also referred to as concepts and conventions.

The money brought into the business by the owner is called Capital or Owner’s Equity. It is credited to the capital account. The Capital can be brought in cash or assets by the owner. Capital is an obligation of the business that has to be paid back to the owner. Because business is a separate entity from its owner. Therefore, the Capital is shown on the liabilities side of the  Balance sheet. The capital account is shown after deducting the Drawings by the owner. Drawings are the amount of cash, goods or assets taken by the owner for personal use from the business.

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.

Closing stock being valued at cost price or Net realisable value, whichever is lower, is the best example of it.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs. 

The cost of inventories should comprise all costs of purchase, Costs of conversion and other costs incurred in bringing  the inventories to their present location and condition. 

Hence, as per AS-2 and conservatism concept, "Inventories should be valued at the lower of cost and net realisable value."

In cases where installation fees are other than incidental to the sale of a product, they should be recognised as revenue only when the equipment is installed and accepted by the customer. Revenue should be recognised when the service is completed.

When there is cash purchase then