Accounting Equation Effects Test 30

As per going concern concept, Prepaid insurance is shown on the asset side of the balance sheet. This concept states that business has an indefinate life. Therefore, not all the expenses are shown as expense instead some are shown as asset.

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. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner. 

As the machine is acquired for personal use, therefore, it should not be debited to the office equipment account. the Business entity concept states that the businessman is separate from the business.
Therefore, the personal expense of the owner shall not be recorded in the business books of accounts.

The calculation of depreciation is based upon Cost principle. This principle requires that the depreciation expense reported on the income statement, and the asset amount that is reported on the balance sheet, should be based on the historical (original) cost of the asset.

The convention of conservatism is 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 cost concept states that an asset should be recorded at its historical cost and not at the market value.
As per Cost Concept, the fixed asset is recorded its historical cost or purchase price plus expenses incurred to use it.
The fixed asset is never recorded at its market price due to this concept only.

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 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.