Question 1 Explain the following accounting concepts: a.Business entity concept b.Matching concept c.Going concern d.Accruals concept ...

Question 1

Explain the following accounting concepts:

a.Business entity concept
b.Matching concept
c.Going concern
d.Accruals concept
e.Consistency concept

Solutions

Expert Solution

a) business entity concept: The business entity concept states that the business should be treated as a separate entity and have separate existence from the owner. for example If the building which is personally owned by the owner and being rented out to the company, the rent on such building should be recorded as Rent in the books of accounts and to be paid to the owner

b) matching concept: Matching concept says that the business should recognize the related expenses on the same Financial year where the Revenue is being generated on spending such expenditure and viz versa.

Eg: The expense relating to the construction of a particular building should be recognized on the same year where the Contract amount on such building is being received by the builder

c) Going concern: the business should always record it's transactions as the company will continue its operations for coming years also and not that the company is going to close it's operations in next coming year. that is the reason why Fixed assets are recorded at historical cost rather than market value on balance sheet

d) Accrual concept: The accrual concept clarifies that the books of accounts are being maintained on due basis and not on cash payment basis.The accrual concept requires that the revenues and expenses are to be recorded as and when the same is being due and not when the payment is being received on such transaction.

Eg: Salary for the month of march being paid on the month of April to be recorded in the month of march and not in the month of April

e) Consistency concept: The consistency concept requires that the business should follow the same accounting Policies and methods should be followed in all financial years. the change to the methods or policies should be made only for the better presentation and it should be disclosed properly

eg: If Depreciation method followed by the company is Straight-Line method in previous year, it should be followed in current year too.

ekkarill92 answered 11 months ago

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