Chapter 2-Theory Base of Accounting

(b) The Going Concern Assumption

Explanation- The Going Concern Assumption holds that a business or the institution shall last for a long time. Therefore, it is also known as ‘Continuity Assumption.’

(a) The Institute of Chartered Accountants of India.

Explanation- The Institute of Chartered Accountants of India (ICAI) is the regulatory body for standardisation of accounting policies.

(b) GAAP

Explanation- Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity in the preparation and the presentation of financial statements.

(d) Drawings

Explanation- It is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business.

(a) The Going Concern Assumption

Explanation- On the basis of this assumption, fixed assets are recorded at their original cost and are depreciated in a systematic manner without reference to their market value.

(d) disclosure of accounting policies

Explanation- Accounting Standard-1 stands for disclosure of accounting policies which are to be used by the firm in business practices.

(b) >inter-firm comparisons

Explanation- The comparability of information is required both the firms to make inter-firm comparisons.

(a) Revenue principle

Explanation- Accrual assumption and Revenue Principle are similar in nature. Both of them helps in knowing whether the firm has earned profit or suffered a loss.

(b) principles

Explanation- The term ‘principle’ has been defined by AICPA as ‘A general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice’.

(d) Cash Flow Statement

Explanation- AS-3 stands for Cash Flow Statement which tells how much cash has come in the organisation and how much has gone out of the organisation.

(a) Conservatism

Explanation- The essence of this principle is ‘‘anticipate no profit and provide for all possible losses.’’

(b) Intangible assets

Explanation- By intangible assets, we mean the assets which cannot be seen but can only be felt like Goodwill.

(b) >The money measurement assumption

Explanation- An event, however, important it may be to the business will not be recorded unless its monetary effect can be measured with a fair degree of accuracy.

(a) Depreciation Accounting

Explanation- AS-6 is depreciation standar

d. Depreciation means fall in the value of assets.

(d) Money

Explanation- The basic measurement in accounting is money. Money is a common denominator to express the heterogeneous items of business.

(b) >Accounting period

Explanation- For reporting purposes, the entire life of the firm is divided into time- intervals. In accounting such a time interval is called ‘accounting perio

d.’ The accounting period is usually for one year.

(b) Accounting for investments

Explanation- AS-13 stands for accounting for investments. Accounting for investments is the accounting which is prepared to keep an eye on investments in the firm.

(a) Realisation principle

Explanation- The Revenue Principle is also known as Realisation Principle. It holds that revenue is considered to have been realised either in cash or a legal obligation to receive has been establishe

d.

(b) Valuation of inventories

Explanation- AS-2 stands for valuation of inventories. By valuation of inventories, we mean that how much stock is laying with the organisation.

(d) Long-term contracts

Explanation- In case of long-term contract, it is difficult to postpone the revue till the completion of full contract as the revenue is realised before the contract is complete.

(b) >Dual aspect.

Explanation- It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places.

(a) Drawings

Explanation- It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use.

(a) Accounting for government grants

Explanation- Accounting stands for Accounting for government grants. It is the accounting which is prepared and maintained in order to keep a record on Government grants.

(d) Bundle of services

Explanation- An asset may be defined as a bundle of services. When we purchase an asset, for example, a personal computer, for a sum of Rs. 40,000, what we are buying really is the services of the computer that we shall be getting over its estimated life span, say 6 years.

(b) >Construction contracts

Explanation- AS-7 stands for construction contracts. All types of construction contracts come under this accounting standar

d.

(a) One year

Explanation- The accounting period is usually for one year. It starts from April 1^st and end on March 31^st.

(b) Accounting for fixed assets

Explanation- AS-10 stands for accounting for fixed assets. This keeps a record of the accounts for fixed assets.

(b) >Uncertainty

Explanation- In case of uncertainty, revenue is not recognised even when goods are sent to customers. For example, sale on hire-purchase basis often involves withholding of title by the seller until the last instalment is pai

d. In this case only a part of the total revenue is treated as realised upon receipt of cash.

(a) Accounting for taxes on income

Explanation- As-22 stands for accounting for taxes on incomes which holds the accounting for taxes which have been paid on the income earne

d.

(d) Owners

Explanation- The difference between the liabilities and the assets is represented by capital, i.e., amount due to owners.

(d) Borrowing costs

Explanation- AS-16 stands for borrowing costs. Borrowing costs includes the cost which is incurred on taking the borrowing sum.

(b) Depreciation

Explanation- The Accounting period assumption focuses that the expenditure whose benefit will accrue over a long period should be apportioned suitably over each year. An example of such expenditure is depreciation on machinery. This requires a process of estimation.

(b) >Leases

Explanation- AS-19 stands for leases. It keeps an eye on the leases transactions done by a firm.

(a) Expenses

Explanation- Expenses are the using or consuming of goods and services in the process of obtaining revenues.

(b) >Impairment of assets

Explanation- AS-28 is the accounting standard which is for impairment of assets.

(d) Historical cost

Explanation- The historical cost is the amount of cash or its equivalent paid for acquiring an asset or service. The amount so paid or cost is an asset to the extent it is useful in future or it is unexpire

d.

(b) Related party disclosures

Explanation- AS-18 is the accounting standard which defines the related party disclosures.

(a) Period costs

Explanation- Period costs should be allocated to the goods sold in a systematic and rational manner. These costs must be recognised as expenses in the accounting period in which they are incurred to earn revenues.

(b) >revenue recognitions

Explanation- AS-9 stands for revenue recognition. This accounting standard helps in recognising the revenue which a firm has earned during an accounting year.

(b) Cost concept

Explanation- The cost concept 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.

(d) Earnings per share

Explanation- The earnings per share are recorded with the help of Accounting Standard-20.

(b) >Current assets

Explanation- Prepaid expenses is the part of current assets which can be converted into cash within a period of one year.

(b) >Segment reporting

Explanation- AS-17 stands for segment reporting in the firms.

(d) Accounting for amalgamations

Explanation- AS-14 stands for accounting for amalgamations. When two firms are amalgamated this accounting standard is taken into consideration.

(b) Revenue

Explanation- Revenue is an inflow of assets which results in an increase in the owner’s equity. Examples of revenue are receipts from the sale of goods, rent, income etc.

(b) Net profit or loss

Explanation- AS-5 stands for the Net Profit or Loss for the period, Prior Period items and Changes in Accounting Policies.

(d) Assets - Capital

Explanation- Liabilities are debts, they are amounts owed to creditors. Thus, the claims who are not owners are called ‘‘Liabilities.’’

(d) Accounting for research and development

Explanation- The research and development in accounting is done with the help of Accounting Standard-8.

(b) >Assets - Liabilities

Explanation- Capital is also known as Owner’s Equity, proprietorship and net worth. Owner’s Equity means owner’s claim against the assets of the business. It will always be equal to assets less liabilities.

(b) Discontinuing operations

Explanation- AS-24 stands for discontinuing operations in the firm.

(d) Window dressing

Explanation- Window dressing is showing a better position better than what it is.

(a) Financial reporting of interest in joint ventures

Explanation- AS-27 stands for the financial reporting of interest in joint ventures of the firms.

(b) International Accounting Standard Committee.

Explanation- International Accounting Standard Committee (IASC) was set-up in the year 1973.

(b) >Contingencies and events

Explanation- AS-4 stands for Contingencies and Events Occurring after the Balance Sheet Date.

(d) Substance over form

Explanation- Substance over form means that the accounting treatment and its presentation in financial statements should be governed by the substance of the transaction and not by its legal form alone.

(a) Interim financial reporting

Explanation- AS-25 stands for the interim financial reports prepared by the firms.

(b) >Owner’s equity

Explanation- It is a firm principle of law that the owner’s equity or capital on the business can be entertained only after all the claim of outsiders have been met. Therefore, the equation can be amended to

Assets – Outsider’s claims = Owner’s equity

(b) Effect of changes in foreign exchange rates

Explanation- AS-11 stands for the effect of changes in foreign exchange rates.

(d) Stock and prepaid expenses

Explanation- Current assets are those assets which can be converted into cash within a period of one year.

(d) Consolidated financial statements

Explanation- Accounting Standard 21 is for consolidated financial statements.

(b) Long-term loans and public deposits

Explanation- Long-term loans and public deposits are the examples of fixed liabilities which cannot be paid off within a period of one year.

(a) Provisions, contingent liabilities

Explanation- AS-29 stands for Provisions, Contingent liabilities and Contingent assets.

(b) >The Full Disclosure Principle

Explanation- The purpose of this principle is to communicate all material and relevant facts concerning financial position and the results of operations to the users. It emphasises that the financial statements should make full disclosure of material financial information.

(d) Accounting for investments

Explanation- AS-23stands for Accounting for Investments in associates in Consolidated Financial Statements.

(b) The matching principle

Explanation- The matching principle provides the guidelines as to how the expense be matched with revenue. It requires that costs should be recognised as expenses in the period in which revenue is realise

d.

(a) Accounting for retirement benefits

Explanation- AS-15 stands for Accounting for Retirement Benefits in the Financial Statements of Employers (recently revised and titled as ‘Employee Benefits’)

(b) >Institute of Cost and Work Accountants of India

Explanation- Institute of Cost and Work Accountants of India is the member of International Accounting Standards Committee.

(d) 1977

Explanation- The Institute of Chartered Accountants of India, in the year 1977, had set up Accounting Standards Boar

d. The function of the Accounting Standards Board is to develop accounting standards on a variety of accounting issues confirming to the Indian laws and business practices.

(b) Assets

Explanation- The equation says that the assets of a business are always equal to the claims of owners and the outsiders.

(b) Securities and Exchange Board of India

Explanation- SEBI mandates complete disclosures to be made by the companies, to give a true and fair view of profitability and the state of affairs.

(a) Two types

Explanation- The systems of recording transactions in the books of accounts are generally classified into two types, viz. Double Entry system and Single Entry system.

(b) Two

Explanation- There can be two broad approaches to accounting. These are:

(i) Cash basis

(ii) Accrual basis

(b) >Accounting Standard Board

Explanation- Accounting Standard Board was constituted by ICAI for developing Accounting Standard in 1977.

(d) Business entity

Explanation- This concept assumes that business has distinct and separate entity from its owners. Thus, for the purpose of accounting, business and its owners are to be treated as two separate entities.

(b) Consistency

Explanation- This concept states that accounting policies and practices followed by enterprises should be uniform and consistent over the period of time so that results are comparable. We can compare results when the same accounting principles are consistently being applied by different enterprises for the period under comparison.