Question

) State & explain the principles of accounting on which each of the treatments            described below are based. ( explain the principle first and relate it with the scenario)

1. Calibre or quality of management is not disclosed on the balance sheet.
2. Debentures are marked at the same amount in the shillings which the company borrowed though the purchasing power of many may have substantially changed.
3. Advance received from a customer is not taken as income or sales.
4. Rent paid for that portion of the premises utilized by the owner of the business for his personal use is reduction of owner’s equity.

Costs of advertising campaign are charged as expense in the period in which they are incurred.               

Answer 1

i.

Money Measurement : The concept of money measurement states that only those transactions and happenings in an organisation, which can be expressed in terms of money are to be recorded in the book of accounts. Also, the records of the transactions are to be kept not in the physical units but in the monetary units.

ii.

iii.when we receive Advance from customers , it is basically the amount provided by customers early but the actual revenue has not been earned yet. This is based on revenue recognition principle and do cover prudence concept and so the same is not recorded as sales or Income

iv.Business Entity Concept

Financial accounting is based on the premise that the transactions and balances of a business entity are to be accounted for separately from its owners. The business entity is therefore considered to be distinct from its owners for the purpose of accounting.

Therefore, any personal expenses incurred by owners of a business will not appear in the income statement of the entity. Similarly, if any personal expenses of owners are paid out of assets of the entity, it would be considered to be drawings for the purpose of accounting much in the same way as cash drawings.

The business entity concept also explains why owners' equity appears on the liability side of a balance sheet (i.e. credit side). Share capital contributed by a sole trader to his business, for instance, represents a form of liability (known as equity) of the 'business' that is owed to its owner which is why it is presented on the credit side of the balance sheet.

v.

Matching principle

The principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. An example of this is Advertising Expense and Research and Development Expense.