REVISION EXERCISE -3 THEORY BASE OF ACCOUNTING (ACCOUNTING PRINCIPLES)ASSIGNMENT # 3
2nd MAY,2020
DAY 5
11B 1st & 11A 6th period
PLEASE MARK YOUR ATTENDANCE BY CLICKING ON THE LINK BELOW AND FILLING UP YOUR DETAILS:
DAY 5
11B 1st & 11A 6th period
PLEASE MARK YOUR ATTENDANCE BY CLICKING ON THE LINK BELOW AND FILLING UP YOUR DETAILS:
11B ATTENDANCE LINK
Theory Base of Accounting
A Quick Recap of:
Principles & Concepts of Accounting.
• Business Entity Concept
• Money Measurement Concept
• Prudence or Conservatism
• Dual Aspect or Duality
• Matching Concept
• Historical Cost Concept
1.Business Entity Concept
A business is a separate entity from its owners. This basically means that personal transactions of the owners of the business are to be treated separately from the business transactions.
Examples
Mr. A, a lawyer has 5 rooms in his house, which he has rented for Rs 50,000 per month. He decided to start his own practice for which he decided to use one of the rooms. According to the business entity concept, only 1/5th of the rent i.e. Rs 10, 000 should be charged to business, as the other 4 rooms are used for personal purposes.
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2. Money Measurement Concept
According to the money measurement concept, only the transactions that are measurable in money terms are to be recorded in the books of accounts of the business. On the other hand, those transactions that are not measurable in monetary terms are to be left out of record. There are two inherent limitations in this concept which are:
Items that cannot be expressed in terms of money cannot be recorded as accounting transactions. For example, employee skill level, working conditions, loyalty of customers, employee morale etc.
WATCH THE VIDEO BELOW
3. Prudence or Conservatism
While preparing accounting statements we make use of estimates as certain accounting data might be uncertain but it is important to disclose the same in order to present a true and fair view of actual position of the business. While making such estimates an accountant has to be prudent or must have a conservative outlook regarding the same.
The concept of Prudence states that “One shall not anticipate profit but shall always provide for all prospective losses”. This makes sure that the assets and incomes are not overstated, while liabilities and losses are not understated.
Example
Bad debts are bound to occur in any form of business. Due to the principle of prudence we make provision for bad debts which helps a business show its current position.
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4. Dual Aspect or Duality
This concept states that every financial transaction has two fold effects. These two aspects always have equal effect. In simple terms we can state that for every debit there exists a credit.
For example, Mr. A started his business with an amount of Rs 1,00,000; this will result in- an increase in the cash balance on the asset side by Rs 1, 00,000. Due to operation of duality, the owner’s equity or capital will also increase by an equal amount. We can observe here that the two items that got affected are cash and capital account.
In a similar way, let’s suppose Tom bought goods worth Rs 50,000 on credit then on one hand his assets will increase by Rs 50,000 while on the other hand his liabilities will also increase by Rs 50,000.
Hence the duality principle can be expressed in terms of fundamental Accounting Equation which can be written as follows: Assets = Liabilities + Capital
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5. Matching Concept
According to the matching principle, the expenses which have been incurred to earn revenue shall be recorded in the same accounting period during which such revenue is recognised and not in the next or previous accounting period.
Example
1. Sales worth Rs 5,00,000 is made in 2012. Total Inventory worth Rs 2,50,000 were purchased, of which Rs 50,000 remained in hand at the end of 2012.
Rs 2,00,000 [i.e. Rs 2,50,000 minus Rs 50,000] is the cost of earning revenue worth Rs 5,00,000 and this 2,00,000 shall be recorded in 2012 resulting in gross profit of Rs 3,00,000.
WATCH THE VIDEO LINK BELOW:
Theory Base of Accounting
Principles and Concepts of Accounting:
Learning Objectives:A Quick Recap of:
Principles & Concepts of Accounting.
• Business Entity Concept
• Money Measurement Concept
• Prudence or Conservatism
• Dual Aspect or Duality
• Matching Concept
• Historical Cost Concept
1.Business Entity Concept
A business is a separate entity from its owners. This basically means that personal transactions of the owners of the business are to be treated separately from the business transactions.
Examples
Mr. A, a lawyer has 5 rooms in his house, which he has rented for Rs 50,000 per month. He decided to start his own practice for which he decided to use one of the rooms. According to the business entity concept, only 1/5th of the rent i.e. Rs 10, 000 should be charged to business, as the other 4 rooms are used for personal purposes.
2. Money Measurement Concept
According to the money measurement concept, only the transactions that are measurable in money terms are to be recorded in the books of accounts of the business. On the other hand, those transactions that are not measurable in monetary terms are to be left out of record. There are two inherent limitations in this concept which are:
Items that cannot be expressed in terms of money cannot be recorded as accounting transactions. For example, employee skill level, working conditions, loyalty of customers, employee morale etc.
WATCH THE VIDEO BELOW
3. Prudence or Conservatism
While preparing accounting statements we make use of estimates as certain accounting data might be uncertain but it is important to disclose the same in order to present a true and fair view of actual position of the business. While making such estimates an accountant has to be prudent or must have a conservative outlook regarding the same.
The concept of Prudence states that “One shall not anticipate profit but shall always provide for all prospective losses”. This makes sure that the assets and incomes are not overstated, while liabilities and losses are not understated.
Example
Bad debts are bound to occur in any form of business. Due to the principle of prudence we make provision for bad debts which helps a business show its current position.
4. Dual Aspect or Duality
This concept states that every financial transaction has two fold effects. These two aspects always have equal effect. In simple terms we can state that for every debit there exists a credit.
For example, Mr. A started his business with an amount of Rs 1,00,000; this will result in- an increase in the cash balance on the asset side by Rs 1, 00,000. Due to operation of duality, the owner’s equity or capital will also increase by an equal amount. We can observe here that the two items that got affected are cash and capital account.
In a similar way, let’s suppose Tom bought goods worth Rs 50,000 on credit then on one hand his assets will increase by Rs 50,000 while on the other hand his liabilities will also increase by Rs 50,000.
Hence the duality principle can be expressed in terms of fundamental Accounting Equation which can be written as follows: Assets = Liabilities + Capital
5. Matching Concept
According to the matching principle, the expenses which have been incurred to earn revenue shall be recorded in the same accounting period during which such revenue is recognised and not in the next or previous accounting period.
Example
1. Sales worth Rs 5,00,000 is made in 2012. Total Inventory worth Rs 2,50,000 were purchased, of which Rs 50,000 remained in hand at the end of 2012.
Rs 2,00,000 [i.e. Rs 2,50,000 minus Rs 50,000] is the cost of earning revenue worth Rs 5,00,000 and this 2,00,000 shall be recorded in 2012 resulting in gross profit of Rs 3,00,000.
WATCH THE VIDEO LINK BELOW:
MATCHING CONCEPT VIDEO LINK
6. Historical Cost Concept
As discussed till now, accountancy relates to past events and the basic objective of preparation of financial statements is to enable comparability of financial data and consistency in adoption of financial policies. In order to achieve the above objectives the transactions shall be recorded on historical cost. In case in the subsequent period there is an increase in the value of the assets then the same shall not be recorded in the books of accounts.
Examples
1. In May 2013, 1000 units of inventory were purchased by Mr. X for Rs 10 per unit, in June 2013 the value of Inventory rose to Rs 12 per unit. According to the historical cost concept, the inventory shall appear at Rs 10,000 not at Rs 12,000.
2. XYZ Ltd. developed ERP software at a cost of Rs 25,00,000, while the benefit that can be derived out of the same is Rs 75,00,000. In such a situation, we will recognise Rs 25,00,000 in the Balance sheet as the cost of ERP and not Rs 75,00,000.
ASSIGNMENT # 3
1.According to the ____principle, the stock is valued at lower of cost or net realizable value.
2.According to______ personal transactions of the owner are kept separate from the business.
3. Accounting records only those transactions, which can be measured in terms of _____.
4. All transactions are recorded in the books from the _____ point of you.
5. Recognition of expenses in the same period as associated revenues is called ________concept.
6. The accounting concept that refers to the tendency of accountants to resolve uncertainty and doubt in favour of understanding assets and revenues and overstating liabilities and expenses is known as ______.
7. The fact that business is separate and indistinguishable from its owner is best exemplified by the______ concept.
8. Everything a firm owns, it also owes out to somebody. This co-incidence is explained by the_______ concept.
9. If a firm believes that some of its debtors may default, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the_____ concept.
10. The management of a firm is remarkably incompetent, but the firms accountants cannot take this into account while preparing book of accounts because of______ concept.
P.S
KEEP YOUR DOUBTS READY AS WE WILL MEET ON GOOGLE MEET ON MONDAY,THE 4TH MAY,2020
6. Historical Cost Concept
As discussed till now, accountancy relates to past events and the basic objective of preparation of financial statements is to enable comparability of financial data and consistency in adoption of financial policies. In order to achieve the above objectives the transactions shall be recorded on historical cost. In case in the subsequent period there is an increase in the value of the assets then the same shall not be recorded in the books of accounts.
Examples
1. In May 2013, 1000 units of inventory were purchased by Mr. X for Rs 10 per unit, in June 2013 the value of Inventory rose to Rs 12 per unit. According to the historical cost concept, the inventory shall appear at Rs 10,000 not at Rs 12,000.
2. XYZ Ltd. developed ERP software at a cost of Rs 25,00,000, while the benefit that can be derived out of the same is Rs 75,00,000. In such a situation, we will recognise Rs 25,00,000 in the Balance sheet as the cost of ERP and not Rs 75,00,000.
ASSIGNMENT # 3
1.According to the ____principle, the stock is valued at lower of cost or net realizable value.
2.According to______ personal transactions of the owner are kept separate from the business.
3. Accounting records only those transactions, which can be measured in terms of _____.
4. All transactions are recorded in the books from the _____ point of you.
5. Recognition of expenses in the same period as associated revenues is called ________concept.
6. The accounting concept that refers to the tendency of accountants to resolve uncertainty and doubt in favour of understanding assets and revenues and overstating liabilities and expenses is known as ______.
7. The fact that business is separate and indistinguishable from its owner is best exemplified by the______ concept.
8. Everything a firm owns, it also owes out to somebody. This co-incidence is explained by the_______ concept.
9. If a firm believes that some of its debtors may default, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the_____ concept.
10. The management of a firm is remarkably incompetent, but the firms accountants cannot take this into account while preparing book of accounts because of______ concept.
P.S
KEEP YOUR DOUBTS READY AS WE WILL MEET ON GOOGLE MEET ON MONDAY,THE 4TH MAY,2020
John alexander
ReplyDelete11B
4
Hebin Jose
ReplyDelete11-A
Roll No-22
Ma'am if the value of assets decrease, then also will the cost will remain the same [to follow history cost concept] ??
ReplyDelete