Account 3 Marks Question

Objectives of IFRS:

1. To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the worlds capital markets and other users make economic decisions.
2. To promote the use and rigorous application of those standards.

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.

Comparability is a qualitative characteristic of a financial statement, i.e., the financial performance of a year may be compared with that of another year. It is possible only when accounting practices are consistently followed.

Going Concern Concept is a fundamental accounting concept. It is because of this concept, distinction is made between capital and revenue expenditures and thus assets and liabilities are recognised.

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.

Conservation or Prudence Concept: Prudence or Conservatism Principle is many a time described using the phrase “Do not anticipate a profit, but provide for all possible losses.” Stating differently, it takes into consideration all prospective losses but not the prospective profits. The application of this concept ensures that the financial statements do not paint a bette: picture than what it actually is.
Example: Closing stock is valued at lower of cost or net realisable value (market value) or making the provision for doubtful debts and discount on debtors in anticipation of bad debts and discount.

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.

Consistency Concept: According to the Consistency Assumption, accounting practices once selected and adopted, should be applied consistently year after year. The concept helps in better understanding of accounting information and makes it comparable with that of previous years. Consistency eliminates personal bias and helps in showing results that are comparable. The concept is particularly important when alternative accounting practices are equally acceptable. For example, two methods of charging depreciat on, Written Down Value Method and Straight Line Method, are equally acceptable. Under the assunption, method once chosen and applied should be applied consistently year after year to make the financial statements comparable.

Rules of debit and credit for liability and capital are same because of Business Entity Concept. According to the concept, business is a separate and distinct entity from its owner.

No, the company is not correct because the bank requires year-wise projected account: firstly, to assess the time when the funds shall be required and also how much funds shall be required; and secondly it shall be in a position to monitor the progress of the project at regular intervals

Assets: Assets are the resources controlled by the enterprise as a result of past events and operations from which the future economic benefits shall flow to the enterprise. Thus, assets shall include tangible and intangible assets, which an enterprise owns.
Liabilities: Liabilities are the obligations of the enterprise from the past events and operations, which shall result in outflow of resources, i.e., assets.
Equity: Equity is the difference between the assets and liabilities.

Business Entity Concept: According to the Business Entity Principle, business is considered to be separate from its owners. Business transactions are recorded in the books of account from the business point of view and not from that of the owners. Owners being regarded as separate from business are considered as creditors of the business to the extent of their capital. Their account with the business is credited with the capital introduced and profit earned during the year, etc., and debited by the drawings made. For example, when the proprietor introduces capital, Cash Account or Bank Account is debited and Capital Account is credited. Amount in the credit of the capital is a liability of the enterprise towards the proprietor. This principle applies to every form of enterprise including proprietorship firms.

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.

Stock (inventory) is a measure of something on hand-goods, spares and other items in a business. It is called Stock in hand. In a trading concern, the stock on hand is the amount of goods which are lying unsold as at the end of an accounting period is called closing stock (ending inventory). In a manufacturing company, closing stock comprises raw materials, semi-finished goods and finished goods on hand on the closing date. Similarly, opening stock (beginning inventory) is the amount of stock at the beginning of the accounting period.

Asset created by an accounting entry (and included under assets in the balance sheet) that has no tangible existence or realizable value but represents actual cash expenditure. The purpose of creating a fictitious asset is to account for expenses (such as those incurred in starting a business) that cannot be placed under any normal account heading. Fictitious assets are written off as soon as possible against the firm's earnings.

Going Concern Concept assumes that the business entity will continue its operation for an indefinite period of time. It is necessary to assume so, as it helps to bifurcate revenue expenditure (i.e. expenditure related to current year), and capital expenditure (i.e. expenditure whose benefits accrue over a period of time). For example, a machinery that costs ₹ 1,00,000, having an expected life of 10 years, will be treated as a capital expenditure, as its benefit can be availed for more than one year; whereas, the per year depreciation of the machinery, say ₹ 10,000, will be regarded as a revenue expenditure.

Accounting Standards: Accounting Standards are a set of guidelines, i.e., Generally Accepted Account ng Principles, that are followed for preparation and presentation of Financial Statements. They are accounting rules and procedures relating to measurement, recognition, treatment, presentation and disclosure of accounting transactions in the financial statements issued by the Council of the Institute of Chartered Accountants of India.
Objectives of Accounting Standards are:

1. Minimise the diverse accounting policies and practices with the aim to eliminate them to the extent possible.
2. Promote better understanding of financial statements.

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.

Accounting Standards are the guidelines for the preparation and presentation of Financial Statements. The objective of setting Accounting Standards is to bring uriformity in accounting practices and to ensure transparency, consistency and comparability.

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.

Accounting Standards: Accounting Standards are a set of guidelines, i.e., Generally Accepted Account ng Principles, that are followed for preparation and presentation of Financial Statements. They are accounting rules and procedures relating to measurement, recognition, treatment, presentation and disclosure of accounting transactions in the financial statements issued by the Council of the Institute of Chartered Accountants of India.

A Statement of Comprehensive Income comprises of two statements, i.e., Income Statement and a Statement of Comprehensive Income are prepared. The Statement of Comprehensive Income reconciles the income or loss as per Income Statement with total comprehensive income. The elements or contents of the statement are:

1. Revenue: It increases the economic benefit during the accounting period because of business operations and increase in the value of assets or decrease in liabilities, As a result of it, value of shareholders equity increases.
2. Expense: It is a decrease in economic benefits in the form of outflows during the accounting period because of business operations and/or decrease in the value of assets or increase in liabilities. As a result of it, value of shareholders equity decreases.

Objectives of Accounting Standards are:

1. Minimise the diverse accounting policies and practices with the aim to eliminate them to the extent possible.
2. Promote better understanding of financial statements.
3. Understand significant Accounting Policies adopted and applied.
4. Facilitating meaningful comparison of financial statements of two or more entities.
5. Enhancing reliability of financial statements.

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.

Matching Concept: An important objective of business is to determine profit periodically. It is necessary to match 'revenues of the period with the 'expenses of that period to determine correct profit (or loss) for the accounting period. Profit earned by the business during a period can be correctly measured only when the revenue earned during the perioc. is matched with the expenditure incurred to earn that revenue. It is not relevant when the payment was made or received. Therefore, as per this concept, adjustments are made for all outstanding expenses and prepaid expenses.

According to the Matching Principle, the expenses for an accounting period are matched against related revenues for the determination of profit. On account of this principit, the purchase price of the fixed asset is not taken but only depreciation on fixed asset related to the accounting period is taken.

Matching Concept: An important objective of business is to determine profit periodically. It is necessary to match revenues of the period with the 'expenses' of that period to determine correct profit (or loss) for the accounting period. Profit earned by the business during a period can be correctly measured only when the revenue earned during the perioc is matched with the expenditure incurred to earn that revenue. It is not relevant when the payment was made or received. Therefore, as per this concept, adjustments are made for all outstanding expenses and prepaid expenses.

Concept of Consistency.

Capital is the amount invested in an enterprise by the proprietor (in case of proprietorship) or by partners (in partnership business). It may be in the form of money or assets having a monetary value. It is a liability of the business towards the proprietor or partners which increases with further investments made in the business and the amount of profit earned. On the other hand, it decreases when it is withdrawn (drawings) or loss is incurred by the business.

Ind-AS are the accounting standards issued by the Ministry of Corporate Affairs Government of India, and notified under the Companies Act, 2013 prescribed to be used by the enterprises to prepare financial statements. They are principle based accounting standards in comparison to rule based Accounting Standards. Also they are based or fair value concept.

The term 'Business Transaction' means a financial transaction or economic event entered into by two parties that initiates the accounting process of recording it in the books of account of an enterprise. It is a financial event expressed in terms of money which brings a change in the financial position of an enterprise. Stating differently, it is an agreement between two parties involving transfer or exchange of goods or services.
Examples of business transactions are: Sales of goods, purchases of goods, receipt from debtors, payment to creditors, purchase or sale of fixed assets, payment of interest, payment of dividend, etc.

According to the Money Measurement Principle, transactions and events that can be measured in money terms are recorded in the books of account of the enterprise. Statting differently, money is the common denominator in recording and reporting transactions.
This principle suffers from two major limitations:

1. Transactions and events that cannot be measured in money terms are not recorded in the books of account, howsoever important they may be to the enterprise.

Example: Human resources with the enterprise are important to the enterprise but are not reflected in the financial statements because they cannot be measured and expressed in money terms.

1. The value of money is considered to have static value as the transactions are recorded at the value on the transaction date.

Dual Aspect Concept: According to the Dual Aspect Concept, every transaction entered into by an enterprise has two aspects, a debit and a credit of equal amount. Simply stated, for every debit there is a credit of equal amount in one or more accounts. It is also true vice versa. lior example, Rahul starts a business with a capital of ₹ 1,00,000. There are two aspects to the transaction. On one hand, the business has an asset of ₹ 1,00,000 (cash) while on the other hand, it has a liability towards Rahul of ₹ 1,00,000 (capital of Rahal). Thus, we can say,
Capital (Equities) = Cash (Asset)
₹ 1,00,000 = ₹ 1,00,000

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.

According to the realisation concept, revenue is recognised when an obligation to receive the amount arises. When the goods are invoiced, it is treated as the transfer of ownership of goods from the seller to the buyer and hence the revenue is recognised.

Business Entity Concept: According to the Business Entity Principle, business is considered to be separate from its owners. Business transactions are recorded in the books of account from the business point of view and not from that of the owners. Owners being regarded as separate from business are considered as creditors of the business to the extent of their capital. Their account with the business is credited with the capital introduced and profit earned during the year, etc., and debited by the drawings made. For example, when the proprietor introduces capital, Cash Account or Bank Account is debited and Capital Account is credited. Amount in the credit of the capital is a liability of the enterprise towards the proprietor. This principle applies to every form of enterprise including proprietorship firms.

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.

According to Money Measurement Principle only those transactions are recorded in the books of account which can be measured in terms of money. In other words, non-financial transactions or facts, like the efficiency of the management will never be recorded in the books of account.

No, the owner is not correct because transactions and events are recorded in the books of account if they can be measured in money terms and on the basis of evidences. In the present case, evidence to the effect of loss or profit does not exist on the basis of which the owner can measure the loss in money terms.

Going Concern Concept: The going concern concept of accounting implies that the business entity will continue its operations in the future and will not liquidate or be forced to discontinue operations due to any reason. A company is a going concern if no evidence is available to believe that it will or will have to cease its operations in foreseeable future.
Example: The application of going concern concept of accounting is the computation of depreciation on the basis of expected economic life of fixed assets rather than their current market value. Companies assume that their business will continue for an indefinite period of time and the assets will be used in the business until fully depreciated. Another example of the going concern assumption is the prepayment and accrual of expenses. Companies prepay and accrue expenses because they believe that they will continue operations in future.