Under this basis, incomes are recorded when they are earned or accrued, irrespective of the fact whether cash is received or not, e.g., sales made on credit will be included in the total sales of the period. Similarly, expenses are recorded when they are incurred or become due and not when the cash is paid for them.
An enterprise prepares its accounts under the accrual basis. Salaries arıounting to ₹ 10,000 for the month of March, 2019 were not paid. The owner did not want to account it in the books of account on the ground that the amount was not paid. The ente: prise closes its books of account on 31st March every year. Is he correct?
Answer
No, the owner is not correct because under the Accrual Concept, expense should be accounted at the time when it is incurred and not when it is paid. Salaries for March 2019 have become due on 31st March, 2019 and therefore, should be accounted in the books of account for the year ended 31st March, 2019.
Gurpreet purchased 1,000sq. yards land to build a factory and paid ₹ 15 lakhs towards its cost including registration charges. At the end of the financial year, the value of the land came down to ₹ 13 lakhs. Gurpreet recorded the land at ₹ 13 lakhs and bocked a loss of ₹ 2 lakhs. Is he correct in treating the fall in value as a loss?
Answer
No, Gurpreet is not correct because he has purchased a fixed asset by paying ₹ 15 lakhs. The Cost Concept of Accounting holds that an asset should be recorded in the books at the price paid.
A customer of X Ltd. has discontinued his business. He used to purchase 30% of the total goods produced by X Ltd. Is it a relevant information in your opinion and should be disclosed by X Ltd.
Answer
Yes. The information is of material interest to the users of financial statements and must be disclosed as per the Convention of full disclosure.