Choose three accounting principles and by providing examples explain
Answers
Explanation:
Business-Entity Principle
This principle states that the organization has a separate entity apart from his owner. Every accountant should consider business as distinct from its owner. This means business transactions must be recorded in business books of accounts and owner’s transactions in his books of accounts.
For Example- Company A started a watch business by investing 1,00,000 with which he purchased raw materials for 40,000 and maintained balance in hand. He further withdrew in 8,000 for his personal use from the business.
As per business entity principle, his capital invested will get reduced by 8,000 and these expenses should not be treated as business expenses. Now the business owes 92,000 to the owner.
Accrual Principle
Accrual principle states that the effects of transactions and events are identified at the time when they occur (say mercantile basis) and not on cash or cash equivalent either received or paid. Accrual principle records total revenue generated. Revenue includes gross inflow of cash, receivables and other consideration arising out of business activities.
For Example- Mr Alex started a Jute business. He invested 10,00,000, bought raw materials for the manufacturing of Jute bags for 6,00,000. He manufactured 50,000 Jute bags and sold the same for 8,00,000 to ABC Ltd. ABC Ltd. paid in 5,00,000 in cash and assured him to pay rest of the amount in future.
As per accrual principle, total revenue of Alex is 8,00,000 (say 5,00,000 from cash and 3,00,000 by way of receivables).
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