You are on page 1of 2

SPECTRUM STUDY CIRCLE

(The Acme of Excellence)


+ 15/22 IInd Floor Ashok Nagar, New Delhi-110018.
Ph.: 25499279, 55711031(O), 9810865706(M)

CLASS: XI ACCOUNTANCY CHAPTER - 2 Page 1 of 2

BASIC ASSUMPTION AND BASIC PRINCIPLES


(A) Accounting Entity: In accountancy, a distinction is always made and maintained between the
proprietor(s) and the business firm. Business entity concept means that the business it to be treated as a
separate entity by itself independent of the owner’s entity. The firm and the owner are to be treated as two
separate entities. In the books of account of business, each transaction is recorded from the point of view of
the firm and not from the point of view of the owner. As such when the owner invest money for the firm he
becomes a creditor of the firm and treated likewise. However, in the eyes of law (except in case of
companies when shareholder are treated as distinct from the companies) the entities of the owner(s) are
merged with the firm. The investment of money in the business by the proprietor it will de deemed that the
proprietor has given in the books of the firm by debiting cash A/c and crediting Capital A/c.

(B) Going Concern Concept: According to this concept business unless and until has entered into a state of
liquidation, is to be viewed as having an indefinite life. Long-term business is better than a temporary one.
The reasons for this are:
(i) An individual is provided to invest money in the business.
(ii) Accountant of the business does not make unnecessary assumption regarding the forced sale
values of goods and assets.
(iii) Assets are depreciated on the basis of expected life rather than on the basis of market value.
Going concern concept has been defined as follows:
“A business enterprise in operation, with the prospect of continuing operation in the future, its
liabilities, revenues, operating costs, personnel, policies and prospects; a concept basis to accounting
of importance in the valuation of intangible assets

(C) Money Measurement Concept: A business deals in heterogeneous items expressed in varying physical
units. For examples it may owe 15 machines and equipments 5000 quintals of raw iron 60 kg of zinc. 10000
square metres of land and Rs. 250000 as bank balance. Addition of these will not produce a meaningful total
of what the business owns. If, however these are reduced to a common denomination they become
homogeneous and then the figures would convey their meaning. Money does this function. Expressed in
monetary terms  Rs.1200000 of machines and equipments Rs. 560000 of raw materials Rs. 22000 of zinc,
Rs. 4000000 of land and Rs. 250000 of bank balance the sum Rs. 6032000 depicts the amount (of
properties) owned by the business. This is why the transaction of goods and services are measured in
monetary units to record and report accountings information.
Scope of accounting is however, restricted by the money based recording as it excludes the non-
monetary facts of attributes like quality of product competitors strategies, labour unrest, rift between
production and sales managers, competent management, and so on, which have a direct bearing on the
earnings of the firms. Thus accounting fails to give a complete picture of a concern’s happenings.

(D) Accounting Period Concept: The profit of any concern in calculated by comparing the capital at the
time of beginning of business and at the end of the business. However it is almost impossible to wail till a
very long period. Nor it will be allowed by income-tax rules. It is because of these reasons that some definite
period is decided upon as ‘accounting period’, which is usually a year or twelve months. This is arbitrarily
fixed. This is called accounting period concept. This helps in improving relations between partners.
SPECTRUM STUDY CIRCLE
(The Acme of Excellence)
+ 15/22 IInd Floor Ashok Nagar, New Delhi-110018.
Ph.: 25499279, 55711031(O), 9810865706(M)

CLASS: XI ACCOUNTANCY CHAPTER - 2 Page 2 of 2

(E) Principle of full disclosure: This convention implies that accounts must be honestly prepared an all
significant information must be disclosed therein. This notion is more important in join stock companies
because of divorce between capital and management. Standard forms of Balance Sheet and schedule of
contents of the Profit and Loss Account are prescribed by law. These forms are designed to make disclosure
of all relevant facts compulsorily.

(F) Dual Aspect Principle: This principle is the backbone of accounting since every business transaction
effects atleast two aspects of the business. Sale implies a purchase as receipt entails a payment. Every
financial transaction involves duality of effects  (a) yielding of a benefit, and (b) the giving of benefit. In
case, good are transaction for cash the two simultaneous implicated on the seller would be (1) foregoing of
goods and (2) receipt of cash to that extent; and those on the purchaser would be (i) receipt of goods and (ii)
forgoing of cash to that extent. The transaction thus entails two fold simultaneous effect on each party. This
principle is based on the famous Newton’s Law Motions i.e. to every action there is always and equal and
contrary reaction. Thus every debit must have a corresponding credit and vice-versa and upon this dual
aspect has been raised the whole superstructure of Double Entry System of Accounting. On the basis of this
principle the accounting Equation is developed i.e. Assets = Equities (i.e. Liabilities + Capital).

BASIC CONVENTIONS OF ACCOUNTANCY


(i) Consistency: It means that there should be consistency in respect of accounting policies of the business
throughout i.e. year after year. The procedure for determination of value of stock, the mode of calculating
depreciation should continue to be the same. According to I.A.S.  1 consistency is a fundamental
assumption and it is assumed that according policies are consistent from one period to another. Where this
assumption is not followed, the fact should be disclosed together with reasons.
Consistency serves to eliminate personal bias because the accountant will have to follow consistent
rules, practices and conventions year after year management should not be allowed to indiscriminately a
change the practice at its whims or fancy otherwise, investors would fall prey of the readily manipulated
accounting reports.

(ii) Conservatism (Prudence): The policies should be such which would guard against risks and losses, but
should not necessarily create secret reserves. ‘Provide for all possible losses and don’t anticipate any future
earning’ is a golden rule. According to I.A.S., “Uncertainties inevitable surround many transactions. This
should be recognised by exercising prudence in financial statement. Prudence does not, however justify the
creation of secret or hidden reserves.” Hence conservation is the policy of ‘playing safe’. For example,
valuation of closing stock is always made either at cost or market price whichever is lower so that it may be
fairly valued. On the basis of this convention provision for bad and doubtful debts, provision for discount on
debtors, amortisation of intangible assets like goodwill, preliminary expenses etc., and provision for various
contingent liabilities are made.

You might also like