Explain the following Accounting Principles . 1. Going Concern Assumption 2. Consistency assumption 3. Money measurement Principle 4. Accounting Period Concept 5. Prudence Concept 6. Matching Principle 7. Verifiable objective Principle 8. Dual aspect Principle
Answers
Explanation:
Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. General purpose financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.
The consistency assumption implies that an individual's potential outcome under his or her observed exposure history is the outcome that will actually be observed for that person.
The money measurement concept (also called monetary 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.
An accounting period is a period of time that covers certain accounting functions, which can be either a calendar or fiscal year, but also a week, month, or quarter, etc. Accounting periods are created for reporting and analyzing purposes, and the accrual method of accounting allows for consistent reporting.
Under the prudence concept, do not overestimate the amount of revenues recognized or underestimate the amount of expenses. Also, one should be conservative in recording the amount of assets, and not underestimate liabilities. The result should be conservatively-stated financial statements.
Answer:
1. Going Concern Assumption-
This is the concept that a business will remain in operation for the foreseeable future. This means that you would be justified in deferring the recognition of some expenses, such as depreciation, until later periods. Otherwise, it is important to recognize all expenses at once and not defer any of them.
Because of this concept that a distinction is made between Capital Expenditure and Revenue Expenditure or Capital receipt and revenue receipt.
2. Consistency assumption-NOT IMP FOR CLASS 11
3. Money measurement Principle-
This is the concept that a business should only record transactions that can be stated in terms of a unit of currency. Thus, it is easy enough to record the purchase of a fixed asset, since it was bought for a specific price, whereas the value of the quality control system of a business is not recorded. This concept keeps a business from engaging in an excessive level of estimation in deriving the value of its assets and liabilities.
4. Accounting Period Concept -
According to the Accounting Period Principle, the life of an enterprise is broken into smaller periods so that its performance is measured at regular intervals.
Actual position of the business can be known at the end of its life.
But Users need information from time to time so it is important to prepare Financial Statements at the end of particular year.
Calendar year= 1st January- 31st December
Financial year= 1st April- 31st March
5. Prudence Concept-
This is the concept that Firm should record expenses and liabilities as soon as possible, but to record revenues and assets only when you are sure that they will occur. This introduces a conservative slant to the financial statements that may yield lower reported profits, since revenue and asset recognition may be delayed for some time.
“ Do not anticipate a profit, but provide for all possible losses but not prospective profits.
6. Matching Principle -
This is the concept that, when you record revenue, you should record all related expenses at the same time. Thus, you charge inventory to the cost of goods sold at the same time that you record revenue from the sale of those inventory items. This is a cornerstone of the accrual basis of accounting. The cash basis of accounting does not use the matching the principle.
7. Verifiable objective Principle- NOT IMP FOR CLASS 11
8. Dual aspect Principle-
According to the Dual aspect, every transaction entered into by an enterprise has two aspects, a debit and a credit of equal amount.
Example: Rahul started business with cash Rs 1,00,000
So this transaction has two aspects:
Business has an asset(Cash) of Rs 1,00,000 and a liability( capital) of Rs 1,00,000
CREDIT-MY SCHOOL NOTES