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Theory Based Accounting

The document outlines fundamental accounting concepts essential for financial accounting, including business entity, money measurement, going concern, and matching principles. It also includes questions and activities related to these concepts, emphasizing their application in real-world scenarios. Additionally, it provides examples of common accounting mistakes and their implications for financial statements.

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mridulika015
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28 views4 pages

Theory Based Accounting

The document outlines fundamental accounting concepts essential for financial accounting, including business entity, money measurement, going concern, and matching principles. It also includes questions and activities related to these concepts, emphasizing their application in real-world scenarios. Additionally, it provides examples of common accounting mistakes and their implications for financial statements.

Uploaded by

mridulika015
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Theory Based Accounting

The basic accounting concepts are referred to as the fundamental ideas or basic
assumptions underlying the theory and practice of nancial accounting and are
broad working rules for all accounting activities and developed by the accounting
profession. The important concepts have been listed as below:

S.No Concept Meaning. / Explanation


1 Business entity Assumes that business has a distinct and separate entity from its
owners.
2 Money Transactions and happenings in an organisation which can be
measurement expressed in terms of money

3 Going concern Assumes that a business firm would continue to carry out its
operations indefinitely
4 Accounting period The financial statements are prepared at regular interval, normally
after a period of one year so that timely information is made
available to the users. This interval of time is called accounting
period.
5 Cost Requires that all assets are recorded in the book of accounts at their
purchase price, which includes cost of acquisition, transportation,
installation and making the asset ready to use.
fi
S.No Concept Meaning. / Explanation
6 Dual aspect Every transaction has a dual or two-fold effect and should therefore
be recorded at two places. Assets = Liabilities + Capital
7 Revenue Requires that the revenue for a business transaction should be
recognition included in the accounting records only when it is realised

8 Matching Expenses incurred in an accounting period should be matched with


revenues during that period
9 Full disclosure All material and relevant facts concerning financial performance of
an enterprise must be fully and completely disclosed in the financial
statements and their accompanying footnotes.
10 Consistency Accounting policies and practices followed by enterprises should
uniform and are consistent over the period of time for it allows
comparisons
11 Conservatism Also called ‘prudence’ provides guidance for recording transactions
in the book of accounts and is based on the policy of playing safe.
12 Materiality Requires that accounting should focus on material facts.
13 Objectivity Requires that accounting transaction should be recorded in an
objective manner, free from the bias of accountants and others.

Choose the Correct Answer


1. During the life-time of an entity accounting produce financial statements in accordance with
which basic accounting concept:
(a) Conservation (b) Matching (c) Accounting period d) None of the above
2. When information about two different enterprises have been prepared presented in a similar
manner the information exhibits the characteristic of:
(a) Verifiability (b) Relevance (c) Reliability (d) None of the above
3. A concept that a business enterprise will not be sold or liquidated in the near future is known as :
(a) Going concern (b) Economic entity. (c) Monetary unit (d) None of the above
4. The primary qualities that make accounting information useful for decision-making are :
(a) Relevance and freedom from bias (b) Reliability and comparability
(c) Comparability and consistency (d) None of the above
5. The realisation concept determines when goods sent on credit to customers are to
be included in the sales figure for the purpose of computing the profit or loss for the accounting
period. Which of the following tends to be used in practice to determine when to include a
transaction in the sales figure for the period. When the goods have been:
a. dispatched b. invoiced c. delivered d. paid for
Give reasons for your answer.
Fill in the correct word:
1. Recognition of expenses in the same period as associated revenues is called
_______________ concept.
2. The accounting concept that refers to the tendency of accountants to resolve uncertainty and
doubt in favour of understating assets and revenues and overstating liabilities and expenses is
known as _______________.
3. Revenue is generally recongnised at the point of sale denotes the concept of _______________.
4. The ______________ concept requires that the same accounting method should be used from
one accounting period to the next.
5. The ____________ concept requires that accounting transaction should be free from the bias
of accountants and others.
6. Complete the following:
(i) If a firm believes that some of its debtors may ‘default’, it should act on this by making sure that
all possible losses are recorded in the books. This is an example of the ___________ concept.
(ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the
___________ concept.
(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the
___________ concept.
(iv) The ___________ concept states that if straight line method of depreciation is used in one year,
then it should also be used in the next year.
(v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock
may be increased. Normal accounting procedure is to ignore this because of the ___________.
(vi)If a firm receives an order for goods, it would not be included in the sales figure owing to the
___________.
(vii) The management of a firm is remarkably incompetent, but the firms accountants can not take
this into account while preparing book of accounts because of ___________ concept.

Activity 1
Ruchica’s father is the sole proprietor of ‘Friends Gifts’, a firm engaged in the sale of gift items. In
the process of preparing financial statements, the accountant of the firm Mr. Goyal fell ill and had to
proceed on leave. Ruchica’s father was urgently in need of the statements as these had to be
submitted to the bank, in pursuance of a loan of ` 5 lakh applied for the expansion of the business of
the firm. Ruchica who is studying Accounting in her school, volunteered to complete the work. On
scrutinising the accounts, the banker found that the value of building bought a few years back for `
7 lakh has been shown in the books at ` 20 lakh, which is its present market value. Similarly, as
compared to the last year, the method of valuation of stock was changed, resulting in value of goods
to be about 15 per cent higher. Also, the whole amount of ` 70,000 spent on purchase of personal
computer (expected life 5 years) during the year had been charged to the profits of the current year.
The banker did not rely on the financial data provided by Ruchica. Advise Ruchica for the mistakes
committed by her in the preparation of financial statements in the context of basic concepts in
accounting.
Q: Analyze the following transactions and also show their effects on the assets and liabilities
using the Modern Approach to Accounting.
1. Commenced business with cash ₹100000
2. Paid rent ₹1000
3. Received commission ₹500
4. Introduced additional capital ₹10000 in cash and 5000 in goods.
5. Purchased goods ₹20000 from B
6. Sold goods costing ₹10000 at a profit of 25% on the cost
7. Purchased office furniture ₹15000
8. Paid salary in advance ₹1000

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