Account 6 Marks Question

Mohan's sales = 90,000 + 60000 = 15,0000
Mohan's expenses = 70,000
Mohan's income = Mohan's sales - Mohan's expenses
= 1,50,000 - 70,000
= 80,000

Consistency: This concept states that accounting principles and methods should remain consistent from one year to another. These should not be changed from year to year, in order to enable the management to compare the Profit & Loss Account and Balance Sheet of the different periods and draw important conclusions about the working of the enterprise. If a firm adopts different accounting principles in two accounting periods, the profits of current period will not be comparable with the profits of the preceding period. For example, a firm can choose any one of the several methods of depreciation, i.e., straight line method, written down value method or any other method. But it is expected that the method once chosen will be followed consistently year after year. Likewise, the method of stock valuation or making provision for likely bad debts should remain consistent with the previous years otherwise the decisions taken on the basis of accounts will be misleading.

Materiality: This Convention is an exception to the convention of full disclosure. According to this convention, items having an insignificant effect or being irrelevant to the user need not be disclosed. These unimportant items are either left out or merged with other items, otherwise accounting statements will be unnecessarily overburdened.
(AAA) defines the term materiality as under:-
“An item should be regarded as material if there is reason to believe that knowledge of it would influence decision of informed investor.''

Matching Concept states that all expenses incurred during the year, whether paid or not, and all revenues earned during the year, whether received or not, should be taken into account while determining the profit of that year. For Example: When some expense such as insurance premium is paid partly for the next year also, the part relating to next year will be shown as expense only next year not this year.
This concept is very important for correct determination of net profit. It is possible that in the same accounting period, the business may either pay or receive payments that may or may not belong to the same accounting period.
This leads to either overcasting or under-casting of the profit or loss, which may not reveal the true efficiency of the business and its activities in the concerned accounting period. Similarly, there may be various expenditures like, purchase of machinery, buildings, etc.
These expenditures are capital in nature and their benefits can be availed over a period of time. In such cases, only the depreciation of such assets is treated as an expense and should be taken into account for calculating profit or loss of the concerned year. Thus, it is very necessary for any business entity to follow the matching concept.

Conservatism: According to this convention, all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealized gains should be ignored. In other words, conservatism is the policy of playing safe. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty. Likewise, when there are different alternatives for recording a transaction, the one having least favourable immediate effect on profits or capital should be adopted. Following are the examples of the application of the principle of conservatism:

1. Closing stock is valued at cost price or realisable value whichever is less.
2. Provision for doubtful debts is created in anticipation of actual bad-debts.
3. Joint life insurance policy is shown only at surrender value as against the arnount paid.
4. Provision for a pending law suit against the firm, which may either be decided . in its favour.

Transactions	Nature of Account
Manu started business with cash	Cash A/c- Debit Capital A/c- Credit
He purchased furniture for business	Furniture A/c- Debit Cash A/c- Credit
Purchased goods on credit from Anshul	Purchases A/c- Debit Creditor A/c- Credit
Paid to his creditor, Anshul	Creditor A/c- Debit Cash A/c- Credit
Paid salary to his clerk	Salary A/c- Debit Cash A/c- Credit
Paid rent	Rent A/c- Debit Cash A/c- Credit
Received interest	Cash A/c- Debit Interest A/c- Credit

Following points highlight the nature of Accounting Standards:

1. Accounting Standards are guidelines providing the framework so that credible Financial Statements are prepared.
2. The objective of setting Accounting Standards is to bring uniformity in accounting practices and to ensure transparency, consistency and comparability.
3. Accounting Standards are prepared keeping in view the business environment and laws of the country. It, therefore, naturally means that the guidelines change with change in business environment and laws. It is because of this that Accounting Standards are being revised from time to time. It may be noted that whenever a conflict arises between law and Accounting Standards, law will prevail.
4. Accounting Standards are mandatory in nature.
5. Accounting Standards have also been made flexible in the sense that where alternative accounting practices are acceptable, an enterprise may adopt any of the practices with a suitable disclosure. For example, an enterprise may charge depreciation on the Written Down Value Method or Straight Line Method.

Money Measurement Concept states that only those events that can be expressed in monetary terms are recorded in the books of accounts. For example, 12 television sets of ₹ 10,000 each are purchased and this event is recorded in the books with a total amount of ₹ 1,20,000. Money acts a common denomination for all the transactions and helps in expressing different measurement units into a common unit, for example rupees.
Thus, money measurement concept enables consistency in maintaining accounting records. But on the other hand, the adherence to the money measurement concept makes it difficult to compare the monetary values of one period with that of another. It is because of the fact that the money measurement concept ignores the changes in the purchasing power of the money, i.e. only the nominal value of money is concerned with and not the real value. What ₹ 1 could buy 10 years back cannot buy today; hence, the nominal value of money makes comparison difficult.
In fact, the real value of money would be a more appropriate measure as it considers the price level (inflation), which depicts the changes in profits, expenses, incomes, assets and liabilities of the business.

	Basis	Accrual Basis of Accounting	Cash Basis of Accounting
1.	Nature of Transactions	Both cash and credit transactions are recorded.	Cash transactions are recorded.
2.	Prepaid/ Outstanding Expenses Accrued Incore/ Income Received in Advance	Prepaid and outstanding expenses are accounted in the Profit and Loss Account. Accrued income and income received in advance are also accounted and shown in the Balance Sheet.	Prepaid and outstanding expenses are no adjusted. Similarly, accrued income received in advance are not adjusted.
3.	Profit or Loss	Correct profit or loss is ascertained because it records both cash and credit transactions.	Correct profit or loss is not ascertained because it records only cash transactions.
4.	Technical knowledge	The Accrual Basis of Accounting requires technical knowledge as many adjustments like prepaid, outstanding, capital and revenue are required to be made.	It does not require much of technical knowledge as is required for Accrual Basis of Accounting.
5.	Legal Position	Accrual Basis of Accounting is recognised by the Companies Act, 2013.	Cash Basis of Accounting is not recognised by the Companies Act, 2013.

Assets:	i Land ii Investments iii Building vii Debtors xii Motor Vehicles xv Goodwill
Liabilities:	vi Bank Overdraft viii Creditors
Capital:	x Capital
Expenses:	v Salary ix Bad Debts xi Depreciation xiii Freight xiv Wages xvi Repairs
Revenue:	iv Interest Received.

Full Disclosure: This Convention requires that all significant information relating to the economic affairs of the enterprise should be completely disclosed. In other words, there should be a sufficient disclosure of information which is of material interest to the users of the financial statements such as proprietors, present and potential creditors, investors and others. The principle is so important that the Companies Act makes ample provisions for the disclosure of essential information in the financial statements of a Company.

Assets:	i Plant and Machinery xii Accrued Income xiii Goodwill xiv Furniture and Fixtures
Liabilities:	ii Bank Loan ix Bills Payable xi Advance Income xv Outstanding Expenses
Capital:	xvi Capital
Expenses:	iv Rent vi Carriage Inwards vii Carriage Outwards viii Purchases x Wages
Revenue:	iii Sales v Discount Received

Convention of prudence: According to this convention, all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealized gains should be ignored. In other words, conservatism is the policy of playing safe. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty. Likewise, when there are different alternatives for recording a transaction, the one having least favourable immediate effect on profits or capital should be adopted. Following are the examples of the application of the principle of conservatism:

1. Closing stock is valued at cost price or realisable value whichever is less.
2. Provision for doubtful debts is created in anticipation of actual bad-debts.
3. Joint life insurance policy is shown only at surrender value as against the arnount paid.
4. Provision for a pending law suit against the firm, which may either be decided in its favour.

Accounting Standards are a set of guidelines, i.e., Generally Accepted Accounting 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.
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.

Financial accounting is concerned with the preparation of the financial statements and provides financial information to various accounting users. It is performed according to the basic accounting concepts like Business Entity, Money Measurement, Consistency, Conservatism, etc. These concepts allow various alternatives to treat the same transaction. For example, there are a number of methods available for calculating stock and depreciation, which can be followed by various firms.
This leads to wrong interpretation of financial results by external users due to the problem of inconsistency and incomparability of financial results among different business entities. In order to mitigate inconsistency and incomparability and to bring uniformity in preparation of the financial statements, accounting standards are being issued in India by the Institute of Chartered Accountant of India. Accounting standards help in removing ambiguities and inconsistencies. Hence, accounting standards and accounting concepts are referred as the essence of financial accounting.

S.No	Name of Accounts	Consequence of decrease	Modern Approach	Traditional Approach
i	Cash	Credit	Assets	Real Account
ii	Bank Overdraft	Debit	Liability	Personal Account
iii	Outstanding Salary Paid	Debit	Liability	Personal Account
iv	Outstanding Rent	Debit	Liability	Personal Account
v	Prepaid Insurance	Credit	Asset	Personal Account
vi	Mohan, proprietor of the business	Debit	Capital	Real Account

The main objective is to keep systematic records,

• To determine profits and loss.
• To ascertain financial position.
• To communicate the information.

Debit refers to the left side of an account and credit refers to the right side of an account. In the abbreviated form Dr. stands for debit and Cr. stands for credit. An item recorded on the debit side of an account is said to be debited to the account.
An item recorded on the credit side of an account is said to be credited to the account. Both debit and credit may represent either increase or decrease depending upon the nature of an account. The rules of debit and credit depend on the nature of account.
personal account = rules says
Debit - the receiver
Credit - the giver
Eg: ram, firms, company, organisation such as bank, etc.
Real accounts = Rules says
Debit - what comes in
Credit - what goes out
Eg: cash, assets like plant and machinery, building, furniture, inventory, etc.
Nominal account = Rule says
Debit - all expenses and losses
Credit - all incomes and gains
Eg: salary or wages paid, interest earned, interest paid, commission paid, depreciation,etc.

Conservation or prudence: 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 better 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. Prudence or Conservatism Principle prescribes that anticipated expenses and losses should be accounted. Thus, as a result liabilities may be overstated. It has a drawback as it may be used to create Secret Reserve (e.g., by creating excess provision for doubtful debts, depreciation, etc.), and thus financial statements may not depict a true and fair view of state of affairs of the business.

Accrual Basis of Accounting: Under Accrual Basis of Accounting, unlike under Cash Basis of Accounting, income is recorded as income when it is earned or accrued. For example, credit sale is recognised as sale irrespective of the fact whether amount has been received or not. Similarly, if an expense has been incurred but payment has not been made, it will be recorded as an expense. For example, rent for the month of March, 2019 has not been paid. It will still be recorded as an expense because it had become due. Accrual Basis of Accounting is based on the concept of realisation and expiration and follows two basic accounting principles, i.e., Revenue Recognition Principle and Matching Principle. Thus, under the Accrual Basis of Accounting, outstanding and prepaid expenses are adjusted. Similarly, accrued income and income received in advance are recognised for ascertaining correct profit or loss for the accounting period.
Advantages: The advantages of Accrual Basis of Accounting are:

1. It is more Scientific compared to Cash Basis of Accounting and hence is preferred by accountants.
2. This basis of accounting shows a complete picture of financial transactions of the business as it takes into account the effect of all transactions relating to a period as well as adjustments like outstanding expenses, prepaid expenses, accrued income and income received in advance.

Money Management Concept: Only those transactions and events are recorded in accounting which are capable of being expressed in terms of money. An event, even though it may be very important for the business, will not be recorded in the books of the business unless its effect can be measured in terms of money with a fair degree of accuracy. For example, accounting does not record a quarrel between the production manager and sales manager; it does not report that a strike is beginning and it does not reveal that a competitor has placed a better product in the market. These facts or happenings cannot be expressed in money terms and thus are not recorded in the books.

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:
Assets = Liabilities + Capital
OR
Capital = Assets - Liabilities

According to the Conservatism Principle, profits should not be anticipated; however, all losses should be accounted (irrespective whether they occurred or not). It states that profits should not be recorded until they get recognised; however, all possible losses even though they may happen rarely, should be provided. For example, stock is valued at cost or market price, whichever is lower. If the market price is lower than the cost price, loss should be accounted; whereas, if the former is more than the latter, then this profit should not be recorded until unless the stock is sold.
There are numerous provisions that are maintained based on the conservatism principle like, provision for discount to debtors, provision for doubtful bad debts, etc. This principle is based on the common sense and depicts pessimism. This also helps the business to deal uncertainty and unforeseen conditions.

Accrual Basis of Accounting Under Accrual Basis of Accounting, unlike under Cash Basis of Accounting, income is recorded as income when it is earned or accrued. For example, credit sale is recognised as sale irrespective of the fact whether amount has been received or not. Similarly, if an expense has been incurred but payment has not been made, it will be recorded as an expense. For example, rent for the month of March, 2019 has not been paid. It will still be recorded as an expense because it had become due.
Accrual Basis of Accounting is based on the concept of realisation and expiration and follows two basic accounting principles, i.e., Revenue Recognition Principle and Matching Principle. Thus, under the Accrual Basis of Accounting, outstanding and prepaid expenses are adjusted. Similarly, accrued income and income received in advance are recognised for ascertaining correct profit or loss for the accounting period It may be noted that the Companies Act, 2013 requires companies to follow accrual basis of accounting in maintaining the books of account.
Advantages: The advantages of Accrual Basis of Accounting are:

1. It is more scientific compared to Cash Basis of Accounting and hence is preferred by accountants.
2. This basis of accounting shows a complete picture of financial transactions of the business as it takes into account the effect of all transactions relating to a period as well as adjustments like outstanding expenses, prepaid expenses, accrued income and income received in advance.
3. This basis discloses correct profit or loss for a particular period and also exhibits true financial position of the business on a particular day.
4. It reflects true profit or loss during the accounting period and, therefore, has wide acceptability.

S.No	Name of Accounts	Consequence of increase	Modern Approach	Traditional Approach
i	Furniture	Debit	Assets	Real Account
ii	Mohan (Proprietor)	Credit	Capital	Personal Account
iii	Salary	Debit	Expense	Nominal Account
iv	Purchases	Debit	Expense	Nominal Account
v	Sales	Credit	Revenue	Nominal Account
vi	Interest Paid	Debit	Expense	Nominal Account
vii	Sohan (Creditor)	Credit	Liabilities	Personal Account
viii	Ram (Debtor)	Debit	Assets	Personal Account

According to this concept, business is treated as a unit separate and distinct from its owners, creditors, managers and others. In other words, the owner of a business is always considered as distinct and separate from the business he owns. Business unit should have a completely separate set of books and we have to record business transactions from firm's point of view and not from the point of view of the proprietor. The proprietor is treated as a creditor of the business to the extent of capital invested by him in the business. The capital is treated as a liability of the firm because it is assumed that the firm has borrowed funds from its own proprietors instead of borrowing it from outside parties. It is for this reason that we also allow interest on capital and treat it as an expense of the business. Interest on capital reduces the profits of the firm and at the same time it increases the capital of the proprietor. Similarly, the amount withdrawn by the proprietor from the business for his personal use is treated as his drawings. Likewise, goods used from the stock of the business for business purposes are treated as the expenditure of the business but similar goods used by the proprietor for his personal use are treated as his drawings.
Because of the concept of separate entity, the proprietor's house, his personal investment in securities, his personal car and personal income and expenditure are kept separate from the accounts of the business entity. Also, if the proprietor has some other business entity doing another business, the records of that business should also be kept separate. In the absence of the concept of separate entity, the net profits and financial position of a business entity cannot be known. The concept of separate entity is applicable to all forms of business organisations, i.e., sole proprietorship, partnership or a company.

The term IFRS refers to the 'International Financial Reporting Standards' issued by International Accounting Standard Board (IASB). IFRS also cover a wide range of International Accounting Standards (IAS) issued by the International Accounting Standard Committee (ASC). International Accounting Standards (IAS) I require financial statements to comply with all requirements of IFRS.
IFRS are very useful for business enterprises carrying on business worldwide. In addition to the enterprises operating globally, IFRS is helpful to investors, industry and accounting professionals in the following way:

1. Helpful to Enterprises Operating Globally: Entities having business operations in different countries will face problems of consolidation of financial statements if they prepare their financial statements according to the standards prevailing in different countries. IFRS unify the accounting practices worldwide as a result of which the problem of consolidation is avoided.
2. Helpful of Investors: Investors require high quality, relevant, reliable, transparent and comparable information in financial statements in order to make economic decisions. The use of common set of high quality accounting standards i.e., IFRS would be helpful to investors in comparison to financial statements prepared under different accounting standards adopted by different countries.
3. Helpful of Industry: Obtaining funds from outside the country becomes easier if the financial statements comply with Globally accepted accounting standards. Now a days most of the stock exchanges require information as per IFRS and Convergence to IFRS would enable Indian Companies to access international capital market easily.

Assets can be classified into (i) Non-current Assets, (ii) Current Assets, and (iii) Fictitious Assets:

1. Non-current Assets: Non-current Assets are those assets which are held by an entity or enterprise not with the purpose to resell but are held either as investment or to facilitate business operations. In other words, those assets are held by the business from a long-term point of view. Examples of non-current assets are Fixed assets, non-current Investments, Long-term Loans and Advances and Other Non-current Assets.

Fixed Assets: Fixed assets are those non-current assets of an enterprise which are held not to resell but with the purpose to increase its earning capacity. Fixed assets are further classified into:

1. Tangible Assets: Tangible Assets are those assets which have physical existence, i.e., they can be seen and touched. Examples of tangible assets are land, building, machinery, computer, furniture, etc.
2. Intangible Assets: Intangible Assets are those assets which do not have physical existence, i.e., they cannot be seen and touched. Examples of intangible assets are patents, goodwill, trademarks, Computer Software, etc.

2. Current Assets: Current Assets are those assets which are held by an entity or enterprise with the purpose of converting them into cash within a short period, i.e., one year. For example, goods are purchased with a purpose to resell and earn profit, debtors exist to convert them into cash, i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
3. Fictitious Assets: Fictitious Assets are those assets which are neither tangible assets nor intangible assets. They are losses not written off in the year in which they are incurred but in more than one accounting period.

Item	Nature of Account
Land & Building	Real A/c
Excise Duty	Nominal A/c
Creditors	Personal A/c
Capital	Personal A/c
Motor Vehicles	Real A/c
Goodwill	Real A/c
Investments	Real A/c
Salary	Nominal A/c
Debtors	Personal A/c
Bad Debts	Nominal A/c
Depreciation	Nominal A/c
Wages	Nominal A/c
Repair	Nominal A/c
Ramesh, a debtor	Personal A/c
Interest Received	Nominal A/c
Bank Overdraft	Personal A/c
Purchase Returns	Nominal A/c
Drawings	Personal A/c
Freight	Nominal A/c
Return Inwards	Nominal A/c

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.
Explain.

1. Matching Concept or Matching Principle 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 period 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. In brief, according to this concept, the expenses for an accounting period are matched against related revenues, rather than cash received and cash paid. This concept should be followed while preparing financial statements to have a true and fair view of the profitability and financial position of a business firm.
2. Revenue Recognition Concept According to the Revenue Recognition Concept, revenue is considered to have been realised when a transaction has been entered into and the obligation to receive the amount is established. It is to be noted that recognising revenue and receipt of an amount are two separate aspects. Let us take an example to understand it. An enterprise sells goods in February, 2018 and receives the amount in April, 2018. Revenue of this sales should be recognised in February, 2018, i.e., when the goods are sold because the legal obligation to receive the amount is established (upon sales) in February, 2018. Let us take another example. Suppose, an enterprise has received an advance in February, 2018 for the sales to be made in May, 2018, revenue shall be recognised in May, 2018, upon sales having been made because the legal obligation to receive the amount is established in May, 2018.

Under Double Entry System of accounting each transaction has two aspects. One aspect is debit, i.e., receiving or incoming aspect. Another aspect is credit, i.e., giving or outgoing aspect. Debit and credit aspects of a transaction form the basis of Double Entry System.
Rules of Double Entry or Rules of Debit and Credit are formed on the basis of these tvo aspects in each of the business transactions. There are two approaches for deciding when to write on the debit side of account and when to write on the credit side of an account, i.e., which account is to be debited and which account is to be credited. The rules on the basis of which such decision is taken are called Rules of Debit and Credit.
Example:
From the following transactions, state the nature of accounts and state which account will be debited and which account will be credited:

1.	Mohan started business with cash	5,00,000
2.	Purchased goods for cash	1,00,000
3.	Sold goods for cash	1,50,000
4.	Received interest from Ram in cash	500
5.	Sold goods to Ashok	60,000
6.	Purchased furniture for cash	50,000
7	Paid wages	20,000

S.No	Transaction	Accounts Involved	Nature of Account	Debit ₹	Credit ₹	Reason
1.	Mohan started business with ₹ 5,00,000 in cash.	Case Capital	Real Presonal	5,00,000	5,00,000	Comes in Giver
2.	Purchased goods for cash ₹ 1,00,000.	Purchases cash	Nominal Real	1,00,000	1,00,000	Expenses Goes out
3.	Sold goods for cash ₹ 1,50,000.	Cash Sales	Real nominal	1,50,000	1,50,000	Comes in Income
4.	Received interest from Ram in cash ₹ 500.	Case Interest	Real nominal	500	500	Comes in Income
5.	Sold goods to Ashok for ₹ 60,000.	Ashok Sales	Real nominal	60,000	60,000	Receiver Income
6.	Purcahsed furnitute for cash ₹ 50,000.	Furniture Cash	Real Real	50,000	50,000	Comes in Goes out
7.	Paid wages ₹ 20,000	Wages Cash	Nominal Real	20,000	20,000	Expenses Goes out

1. Money Measurement Concept: Only those transactions and events are recorded in accounting which are capable of being expressed in terms of money. An event, even though it may be very important for the business, will not be recorded in the books of the business unless its effect can be measured in terms of money with a fair degree of accuracy. For example, accounting does not record a quarrel between the production manager and sales manager; it does not report that a strike is beginning and it does not reveal that a competitor has placed a better product in the market. These facts or 'happenings cannot be expressed in money terms and thus are not recorded in the books.
2. Business Entity Concept: According to this concept, business is treated as a unit separate and distinct from its owners, creditors, managers and others. In other words, the owner of a business is always considered as distinct and separate from the business he owns. Business unit should have a completely separate set of books and we have to record business transactions from firm's point of view and not from the point of view of the proprietor. The proprietor is treated as a creditor of the business to the extent of capital invested by him in the business. The capital is treated as a liability of the firm because it is assumed that the firm has borrowed funds from its own proprietors instead of borrowing it from outside parties!). It is for this reason that we also allow interest on capital and treat it as an expense of the business. Interest on capital reduces the profits of the firm and at the same time it increases the capital of the proprietor. Similarly, the amount withdrawn by the proprietor from the business for his personal use is treated as his drawings. Likewise, goods used from the stock of the business for business purposes are treated as the expenditure of the business but similar goods used by the proprietor for his personal use are treated as his drawings.
3. Matching Concept: This concept is very important for correct determination of net profit. According to this concept, in determining the net profit from business operations, all costs which are applicable to revenue of the period should be charged against that revenue. Accordingly, for matching costs with revenue, first revenues should be recognised and then costs incurred for generating that revenue should be recognised.