Theory Base of Accounting Test - 3

according to Prudence when there are different alternatives for recording a transaction, the one having least favorable immediate effecr on profits or capital should be adopted. Thus we record closing stock at Cost price or market price whichever is lower. As we have to make provision for all anticipated losses but not record anticipated profits.

As per Dual aspect for every debit there is credit. Every transaction should have two sided effect to the extent of same amount.

As per Going concern concept it is assumed that the business will continue to exist for a long period in the future. The transctions are recorded in the books of the business on the assumption that it is a continuing enterprise, unless otherwise.

According to prudence concept, all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealised gains should be ignored. in other words it is the policy of playing safe. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty.

Accoring to accrual concept revenue is recognized when it is earned and expenses is recognised when an obligation of payment arises. Thus Rent of the month of march 2012, though not paid will be recorded as expenses for the year ended 31st March, 2012.

Over a period of time, a number of Generally Accepted Accounting Principles (GAAP) in the form of concepts and conventions have been developed and accepted to bring comparibility and uniformity in the financial statments of various business entities.

The IFRS refers to the Interantional Financial Reporting Standards' which are issued by IASB i.e International Accounting Standard Board.

Consistency concept states that accounting principlea and methods should remain consistent from one year to another. These should not change from year to year, in order to enable the management to compare the Profit & loass account and Balance Sheet of different periods and draw important conclusion about working of the enterprise. Thus Straight Line method used in one year should be followed next year also.

Money is the only measurement which enables various things of diverse nature to be added up together and dealt with. Thus, in above example Rs 120000/- will be recorded in the books and not 12 television sets.

Accounting equation signifies that the aseets of a business are always equal to the total of capital and liabilities.