Accounting Equation Effects Test 3

The going concern principle is the assumption that an entity will remain in business for the foreseable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices.

Separate entity concept assumes that, the firm and its owner are two separate legal entities. Owner of the business is considered as creditors in the books of the firm. Hence, the capital contributed to the business is considered as liability.
Accordingly, if any personal expenses are incurred, those should be debited to the personal account of owner (capital account).

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. 

For all accounting purposes, the business is considered to be a separate entity, distinct from its owner. The transactions of business are recorded in books of accounts of the business and the position of owner in his own books is like a creditor. If any amount is contributed by owner as capital, this will always be treated as liability.

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.

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.

As the going concern concept defines that the life of the business is assumed to be indefinite, the accounting records must be kept for a specific period of time, i.e. accounting period. This may generally be one year.

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.