(a) Why is it important to adopt consistent basis for the preparation of financial statements? Explain.
(b) What is matching concept? Why should a business concern follow this concept?
(c) What is money measurement concept? Which one factor can make it difficult to compare the monetary values of one year with the monetary values of another year?
Answers
Answer:
a) According to the Consistency Principle, accounting practices once selected should be continued over a period of time (i.e. years after years) and should not be changed very frequently. These help in a better understanding of the financial statements and thus make comparisons easy.
b) The purpose of the matching concept is to avoid misstating earnings for a period. The business entities follow this concept mainly to ascertain the true profit or loss during an accounting period.
c) For example, 15 laptops sets of Rs 50,000 each are purchased and this event is recorded in the accounts book with a total amount of Rs 7,50,000. The factor which can make it difficult to compare the monetary values of one year with the monetary values of another year is inflation.
For the given questions the answer are as follows:
(a) By using a consistent accounting method from one accounting period to the next, the financial reports will all hold a similar structure. The financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.
(b) The matching concept is an accounting practice whereby firms recognize revenues and their related expenses in the same accounting period. The business entities follow this concept mainly to ascertain the true profit or loss during an accounting period. This leads to either overcasting or under casting of the profit or loss, which may not reveal the true efficiency of the business and its activities in the concerned accounting period.
(c) It states that a business should only record an accounting transaction if it can be expressed in terms of money. The money measurement concept underlines the fact that in accounting and economics generally, every recorded event or transaction is measured in terms of money, the local currency monetary unit of measure.