Page 210 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 10: Responsibility Accounting and Transfer Pricing

or at the time of execution of the order or at the time of receiving the cash. For answering this Notes
question the accounting is in conformity with the law and recognizes the principle of law, i.e. the
revenue is earned only when the goods are transferred. It means that profit is deemed to have
accrued when ‘property in goods passes to the buyer’ viz. when sales are affected.
Matching

Though the business is a continuous affair yet its continuity is artificially split into several
accounting years for determining its periodic results. This profit is the measure of the economic
performance of a concern and as such it increases proprietor’s equity. Since profit is an excess
of revenue over expenditure it becomes necessary to bring together all revenues and expenses
relating to the period under review. The realization and accrual concepts are essentially derived
from the need of matching expenses with revenues earned during the accounting period.
The earnings and expenses shown in an income statement must both refer to the same goods
transferred or services rendered during the accounting period. The matching concept requires
that expenses should be matched to the revenues of the appropriate accounting period. So we
must determine the revenue earned during a particular accounting period and the expenses
incurred to earn these revenues.

Entity

According to this concept, the task of measuring income and wealth is undertaken by accounting,
for an identifiable Unit or Entity. The unit or entity so identified is treated different and distinct
from its owners or contributors. In law the distinction between owners and the business is drawn
only in the case of joint stock companies but in accounting this distinction is made in the case of
sole proprietor and partnership firm as well.

Example: Goods used from the stock of the business for business purposes are treated as
a business expenditure but similar goods used by the proprietor, i.e. owner for his personal use
are treated as his drawings.

Such distinction between the owner and the business unit has helped accounting in reporting
profitability more objectively and fairly. It has also led to the development of “responsibility
accounting” which enables us to find out the profitability of even the different sub-units of the
main business.

Stable Monetary Unit

Accounting presumes that the purchasing power of monetary unit, say Rupee, remains the same
throughout.

For example, the intrinsic worth of one Rupee is same and equal in the year 1900 and 2000 thus
ignoring the effect of rising or falling purchasing power of monetary unit due to deflation or
inflation. In spite of the fact that the assumption is unreal and the practice of ignoring changes
in the value of money is now being extensively questioned, still the alternatives suggested
incorporating the changing value of money in accounting statements viz., Current Purchasing
Power method (CPP) and Current Cost Accounting method (CCA) are in evolutionary stage.
Therefore, for the time-being we have to be content with the ‘stable monetary unit’ concept.
Cost

This concept is closely related to the going concern concept. According to this, an asset is
ordinarily recorded in the books at the price at which it was acquired, i.e. at its cost price. This
‘cost’ serves the basis for the accounting of this asset during the subsequent period. This ‘cost’
should not be confused with ‘value’.

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