Question
Explain the following:
- Dual Aspect Concept.
- Accrual Concept.
- Going Concern Concept.
- Cost Concept.
- Accounting Period Concept.
✓
Answer
- Dual Aspect Concept: According to this concept, every business transaction is recorded as having a dual aspect. In other words, every transaction affects atleast two accounts. If one account is debited, any other account must be credited. The system of recording transactions based on this principle is called as Double Entry System’. It is because of this concept that the two sides of the Balance Sheet are always equal and the following accounting equations will always hold good at any point of time:
OR
Capital = Assets - Liabilities
- Accural Concept: In accounting, accrual basis is used for recording of transactions. It provides more appropriate information about the performance of business enterprise as compared to cash basis. Accrual concept applies equally to revenues and expenses. In accrual concept revenue is recorded when sales are made or services are rendered and it is immaterial whether cash is received or not. Similarly, according to this concept, expenses are recorded in the accounting period in which they assist in earning the revenues whether the cash is paid for them or not. Thus, to ascertain true profit or loss for an accounting period and to show the true financial position of the enterprise at the end of the accounting period all expenses and incomes relating to the accounting period are recorded whether actual cash has been paid or received or not. Accrual concept is often described as matching concept.
- Going Concern Concept: As per this concept it is assumed that the business will continue to exist for a long period in the future. The transactions are recorded in the books of the business on the assumption that it is a continuing enterprise. It is on this concept that we record fixed assets at their original cost and depreciation is charged on these assets without reference to their market value. For example, if a machinery is purchased which would last, say, for the next 10 years, the cost of this machinery will be spread over the next 10 years for calculating the net profit or loss of each year. Because of the concept of going concern the full cost of the machine would not be treated as an expense in the year of its purchase itself. The market value of the fixed assets is irrelevant and is not recorded in the balance sheet, as these assets are not going to be sold in the near future.
- Cost Concept: According to this concept, an asset is ordinarily recorded in the books of accounts at the price at which it was acquired. This cost becomes the basis of all subsequent accounting for the asset. Since the acquisition cost relates to the past, it is referred to as historical cost. This cost is the basis of valuation of the assets in the financial statements. For example, if a business entity purchases a building for $20,00,000, it would be recorded in the books at this figure. Subsequent increase or decrease in the market value of the building would not be recorded in the books of accounts. If two years later the market value of the building shoots up to 360,00,000, the increased value will not be ordinarily recorded in the books of accounts.
- Accounting Period Concept: As the business is intended to continue indefinitely for a long period, the true results of the business operations can be ascertained only when the business is completely wound up. But ascertainment of profit after a very long period will be of little use to the proprietors, managers, investors and others because it will be too late to take corrective steps at that time. The users of the financial statements need to know the results of the business at frequent intervals. Thus, the entire life of the firm is divided into time-intervals for the measurement of the profits of the business. Twelve month period is usually adopted for this purpose. According to the amended income tax law, a business has compulsorily to adopt financial year beginning on 1st April and ending on 31st March in the next calendar year, as its accounting period. Apart from this, companies whose shares are listed on the stock exchange are required to publish quarterly results to depict the profitability and financial position at the end of three months period.
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₹
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(i)
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| Jan. 1 | Assets: Cash in hand ₹ 20,000; Debtors: Sri Gopal ₹ 15,000, Poonam & Co. ₹ 30,000; Stock ₹ 1,75,000, Machinery ₹ 1,20,000; Furniture ₹ 40,000 |
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