Accounting Equation Effects Test 39

The objectivity principle is the concept that the financial statements of an organization be based on solid evidence. The intent behind this principle is to keep the management and the accounting department of an entity from producing financial statements that are slanted by their opinions and biases.

It requires that accounting transaction should be recorded in an objective and independent manner, free from the bias of accountants and others.

The materiality concept refers to a situation where the financial information of a company is considered to be material from the point of view of the preparation of the financial statements if it has the potential to alter the view or opinion of a reasonable person.

This is the case of the conservatism convention, which is based on "playing safe". The prudence concepts defines that, we should not overestimate the revenues and underestimates the expenses. It is an accounting principle which assumes that, the expenses and losses are to be recorded as soon as they occurs, but the revenues and assets are only to be recorded when they are actually recognized. 

Accounting equation can be termed as:

The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts.

Realization concept assumes that the revenue is recognized only when there is sale or transfer of goods or assets. Sale is complete when the title of goods is passed on to the buyer.

Total assets = Total liabilities

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.

Accounting equation can be termed as:

Total assets = Total liability