Account 3 Marks Question

Fixed assets are not shown in the books at market value because:

1. As per historical concept, we record fixed assets at original cost, and.
2. As per going concern concept, the assets are not going to be sold in the near future. Hence, the market value is irrelevant.

No. Accounts are maintained on the concept of historical costs (i.e., the original cost). According to this concept, an asset is recorded in the books of accounts at the price at which it was acquired.

Yes, the Accountant is right because he has followed the Materiality convention according to which the items having insignificant effect may not be disclosed or in other words, may be written off.

One of the qualitative characteristic of accounting information is comparability i.e., the financial statements must be comparable from year to year. It is possible only when accounting principles are not changed and followed consistently year after year.

No. It is not a correct treatment. The company has violated the convention of prudence according to which current assets are valued at cost price or realisable value whichever is less.

Materiality Convention will be followed in dealing with this item. As per this concept, items having an insignificant effect or being irrelevant to the users of financial statements need not be disclosed. Hence, it will be treated as expense and will be debited to Stationery Account.

Yes. The method and the rate of depreciation can be changed but the change in method will be treated as a change in accounting policy and the company should disclose the change in its financial statements along with its impact on profit or loss.

No, he will not be correct in recording it as sales because the goods have not been delivered as yet and hence the sale is not completed. Mohan has not earned the revenue so far. Under the matching concept, revenue is recognised as earned only when cost incurred to earn that revenue is also recognised as expense in that period.

Entire life of an enterprise is divided into time intervals which are known as accounting periods at the end of which a profit and loss account is prepared to ascertain the profit and a balance sheet is prepared to ascertain the financial position.

1. It is because of this concept that a distinction is made between capital expenditure and revenue expenditure.
2. It is because of this concept that full cost of an asset is not treated as an expense in the year of purchase itself and the cost is spread over the useful life of the asset by charging depreciation on a suitable basis.
3. It is because of this concept that outside parties purchase shares and debentures of the enterprise.

Concept of Consistency.

Because of going concern concept, it is assumed that the business will continue to exist for a long period in the future. Hence, the cost of the asset is spread over its useful life and only the current year's depreciation is treated as expense.

Accounting Concepts Accounting Concepts are the basic assumptions or fundamental propositions within which accounting operates. They are generally accepted accounting rules based on which transactions are recorded and financial statements are prepared. It is important to follow the accounting concepts because it enables the users of financial statements to understand them better and in the same manner.

Yes Convention of conservatism will have two effects:

1. Profit and Loss Account discloses lower profits in comparison to the actual profits.
2. Balance Sheet will disclose understatement of assets and overstatement of liabilities.

These two effects result in creation of secret reserves.

Yes. As per convention of conservatism, all anticipated losses should be recorded, but all anticipated gains should be ignored. Hence, provision for doubtful debts should be created in anticipation of actual bad debts.

Building will be shown in the books at ₹ 17 Lakh. This is because of Historical Cost Concept according to which assets are shown in the books at cost less depreciation.

According to matching concept, all costs which are incurred in an accounting period should be charged against the revenue of that period. Hence depreciation of current year is charged against the current year's revenue. In other words, full cost of the asset is not treated as an expense in the year of its purchase itself rather it is spread over its useful life.