Question

State the accounting concept involved in each of the following situations: 1

a) Advance received from a customer is not taken as income or sales

b) Closing stock is valued at lower of the cost or market value​

Answer 1

ANSWER :

• a) Advance received from a customer is not taken as income or sales

➯ Revenue Recognition Concept is involved in this situation.

• ❍ Revenue Recognition Concept is also known as Revenue Realisation Principle. This concept tells the procedure of determining the income and expense for incorporation in Profit and Loss Account. Revenue Recognition Concept helps in ascertaining the amount as well as the time of recognising the revenue from the ordinary course of business activities. According to Revenue Recognition Concept, revenue is recognised at the point of sale when the title of the goods passes from the buyer to seller, which is usually the date of delivery.

Therefore, advance received from a customer is not taken as income or sales according to Revenue Recognition Concept.

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• b) Closing stock is valued at lower of the cost or market value.

➯ Conservatism (Prudence) Concept is involved in this situation.

• ❍ Conservatism (Prudence) Concept is a modifying concept as it may not be applied in all cases. The word "conservatism" states that all probable or anticipated process should be provided for an all anticipated or under skin should be ignored and the profit should not be overstated.

Therefore, following the Conservatism (Prudence) Concept, closing stock is valued at lower of the cost or market value.