In: Accounting
this is accounting subject ( principle of auditing )
please show me the steps of the solutions.
1) conservation concept emphasizes that profit should never be overstated or anticipated.
True or false and why?
2) evaluation of the closing inventory at its cost or market value whichever is lower is an application of the "cost concept".
True or false and why?
3) explain - briefly the following terms:
business entity - going concern - accruals - materiality - conservatism
1. True.
Conservatism concept states that business entities must provide for all anticipated losses in the books of accounts, but must not disclose any anticipated profits in the books. This accounting concept is now known as prudence. In recroding assets, one should be conservative, on the other hand, while recording of liabilities, one may not be conservative in approach.
2. False.
LCM (Lower of cost of market price) is based on the accounting concept conservatism. It states that certain assets such as inventory must be recorded at lower of their cost price or market value, to avoid over estimation of assets.
3. Business entity: A business entity is an entity which is being formed by person(s) in order to carry out any activity for the purpose of earning profits. It has a common seal. Examples, Corporations, LLPs, Partnership firms, etc.
Going concern: Going concern is a fundamental principle of accounting. It states that a business entity must prepare its books on an assumption that it will continue for infinite time.
Accruals: Accrual concept is the most fundamental principle of accounting. This principle requires to record the revenues when they are earned, and record expenses when they have been incurred, despite of their realization or payment in cash.
Materiality: Materiality concept is an accounting principle which require entities to prepare financial statements which discloses all the matters which may have material impact on the economic decision making of its users.
Conservatism: Conservatism concept states that business entities must provide for all anticipated losses in the books of accounts, but must not disclose any anticipated profits in the books. This accounting concept is now known as prudence. In recroding assets, one should be conservative, on the other hand, while recording of liabilities, one may not be conservative in approach.