Accounting Equation Effects Test 9

According to Business entity concept, a business is treated as a separate entity and is distinct from its owner(s).

As per the convention of disclosure, accountant should show the correct information in the books of accounts. The same should be disclosed by him. In window dressing, an accountant or businessman changes the information in accounting records for getting benefits from outside parties. So, as per convention of disclosure, it should be prohibited.

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. 

The conservatism principle is the general concept of recognising expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognise revenues and assets when they are assured of being received. Under the conservatism principle, if there is uncertainty about  incurring a loss, you should  tend towards recording the loss. conversely, if there is uncertainty about recording a gain, you should not record the gain.

The accounting information provided by the financial statements would be useful in drawing conclusions regarding the working of an enterprise, only when it allows comparisons over a period of time, as well as, with the working of other enterprises. 

As per AS-2, Valuation of inventories (stock-in-trade) prescribed the accounting treatment for inventories and sets the guidance to determine the value at which the inventories are carried in the financial statement. 

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. 

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

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.

The separate Entity Concept states that a businessman is separate from the business. Because of this principle, the amount which the owner invest into the business is known as capital and when the owner withdraws some amount from the business it is known as the drawings.

As per the convention of disclosure, accountant should show the correct information in the book of account. Same information should be disclosed by him. In window dressing, accountant or businessman changes the information in accounting records for getting benefits from outside parties. So, as per convention of disclosure, it should be prohibited.

Accounting has concepts of Matching, Dual aspect and Going concerned but there is no concept of true and fair concept.