Accounting Equation Effects Test 8

Accounting equation is the foundation of double entry system of book-keeping. It displays that all the assets are either financed by borrowing money or paying from the shareholder's equity. The balance sheet being the complex version shows explain the equation very clearly and it shows that total assets is equal to total liability plus shareholder's equity. Debit and credit are similar to accounting equation. Hence, american accountants have derived the rules of debit and credit through accounting equation.

Accounting equation is the foundation of double entry system of book-keeping. It displays that all the assets are either financed by borrowing money or paying from the shareholder's equity. The balance sheet being the complex version shows explain the equation very clearly and it shows that total assets is equal to total liability plus shareholder's equity. The basis for this equation is the principle of rights.

The concept of conservatism provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe. 

Dividends can only be paid out of the profits when it has been realized in cash." 

Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction.

The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.

Hence, the two aspects are giving and receiving of benefits.

Accounting equation:

Materiality being the fundamental concept of accounting states that all important matters of the firm must be disclosed. Items which are important for the firm are called material items. Hence, materiality means relative importance. It depends on the three aspects viz. informational, amounts and procedures. These three aspects are very important for the firm.

Materiality being the fundamental concept of accounting states that all important matters of the firm must be disclosed. Items which are important for the firm are called material items. Hence, materiality means relative importance.

Materiality Principle or materiality concept is the accounting principle that concern about the relevance of information, and the size and nature of transactions that report in the financial statements. 

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 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.

The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated.