Theory Base of Accounting Test - 6

Cost of machinery is recorded at the price paid for the purchase as well as any cost incurred for its installation of the machinery. Therefore total cost of machinery at which it should be recorded is Rs 200000+Rs10000= Rs 210000/-.

According to conservatism principle accountant follows the policy of playing safe, So it removes uncertainty and doubt in favor of undersatting assets and overstating liabilites and expenses like, mainiting proviosn for doubtful debts; showing depreciation but not appreciation ignoring provision of discount on creditors.

Accounting period concept is the concept whihc focuses on the periodical reports on the performance of the business and  money measurment is recording of events which  have financial effect on the business. and going concern concept states that the business will be carried on for a long time.

Going concern concept states the business will continue to exist and carry on its operations for a very long period of time in the future unless there is good evidence to its contrary. Thus we can assume that the business enterprise will not be sold or liquidated in the near future.

Periodicity is the preparation of final accounts for the accounting period and financial position of the business is shown at the end of accointing period. Thus, for all purposes like performance evaluation, tax computation, budgetary control, etc the fianancial staements are preapred at a periodical interval are useful and desirable.

According to prudence or conservatism principle all anticipated losses should be accounted for therefore the closing stock is valued at cost price or market price whichever is lower , so that if the market price is lower than the cost price then the anticipated loss can be recorded in the books.

Provision for doubtful debts is the probable loss which may happen which may not. it  is done due to principle of prudence.And thus provision is not made as per matching concept as it is not the realised loss.

According to revenue recognition principle when the property in goods is transferred to the owner that time sale is taken into effect. So when goods are invoiced to the purchaser that time we say the ownership has been transferred and thus we record the sale at the time of invoicing.

Matching principle states that matching expenses with the revenue earned during the accounting year The earnings and expenses shown in an income statement must both refer to the same goods transferred or services rendered during the accounting year so that it can reveal the true efficiency of the business and its activities in the concerned accounting period and ascertain the true profit or loss during an accounting period.

Revenue Recognition emphasises that profit should be considered only when realised.It will be realised only when the goods are transferred. it means that profit is deemed to have accrued when property in goods passes to the buyer i.e. when sales are effected.No anticipated profites should be taken credit of.

The assumption of going concern is important for bifurcating revenue and capital expenditure as it Revenue expenditure is the one whose benefit will expire within one year and capital expenditure is the one whose benefit can be derived in future. Thus if we negate the assumption of going concern. Then every expense will be revenue expenditure.

Accounting Standards have been developed so that it removes ambiguities i.e. the availability of alternative choices of accounitng methods have created confusion among accounitng circles. The need was felt to reduce or eliminate confusing or ambiguous terms and practices. The Users of financial statements require the accounting information which is comparable. the presence of wide variety of concepts, conventions and principles craeted confusion among them, rather than providinga solid and logical treatment of the transactions. thus all three options are correct.

Accounting standards help the various users of information to understand the financial statements of the business but it is not responsible for the cash trasnactions of the business. thus it is not the objective of the Accounting standard.

Going concern means the business is going to be carried on for a long time and will continue of indefinite period. Thus adjustments are made accordingly in the books of accounts.

According to full disclosure principle, the financial statements must disclose all the material, relevant and relaible information whihc may be more beneficial to the shareholders, creditors, bankers , etc. The loss of machinery should be disclosed in the books of accounts. and company has not disclosed the same. So it is not following full disclosure principle.

Historical concept states the assets purchased should be recorded at the cost price and not market price therefore option a has matching with (ii), Revenue recognition states that revenue is considered only when is realised and not when we assume or when we suppose receive the order for the supply of goods. so b is matched with (i).and full disclosure principle states that the significantly information should be presented fully and completely so that it can used when required.so c is matched with (iii).

According to consistency principle any accounting principle or method which is followed in one year should be follwed in continuing years. thus depreciation policy which is followed in one year should be follwed in next years also.

Revenue is earned only when the goods are transferred. It means that profit is deemed to have accrued when property in goods passes to the buyer . Thus in the above examples Revenue will be recognised in the month of february.

The matching concept states that earnings and expenses shown in an income statement must both refer to the same goods transferred or services rendered during the accounting period. so that the true profit or loss during an accounting period can be ascertained.

According to prudence all anticipated profits should be ignored and all anticipated losses should be accounted for. Thus by recording the anticipated profit on sale of goods which has till now not materialised is violating prudence concept of the accounting and showing inflated profits in the business.