Page 157 - DCOM409_CONTEMPORARY_ACCOUNTING

Contemporary Accounting

Notes 13.2 Analysis of Accounting Principles and Practices

The following are the key accounting principles and their application in financial reporting:

13.2.1 The Money Measurement Concept

Records should be made only of that information that can be expressed in monetary terms.
Although the business may own seven buildings, five boilers, fifty cars, thirty trucks, you
cannot add them together simply and get to know what the business is worth. Expressing these
items in monetary terms by saying that you have buildings worth ` 15 crores, boilers worth ` 50
lacs, cars worth ` 1 crore and trucks worth ` 2 crores would make it easier for you to add up these
items by adding their monetary values. You cannot add apples and oranges directly but they can
be added easily by expressing them in monetary terms.
Thus, money provides a common denominator by which the resources and other factors about
the business entity can be expressed and valued. Expressing in monetary terms also helps in
understanding the changes their impact on value of the resources.

Example: If R has invested ` 200,000 in the “R Enterprise” then it can be recorded in the
books of “R Enterprise” but on the other hand if R has put a lot of efforts for the welfare of the
company then the efforts can not be measure in terms of money.
As you can see, this concept imposes a severe limitation on the scope of accounting. It is impossible
for the accounting to record or report the dearth of the key people of the organisation, or that a
plant is not working, that labourers are going on strike, or that key people are leaving the
organisation and other important factors that may have a direct bearing on the future of the
organisation.
13.2.2 Entity Concept

Accounts can only be kept for entities, which are different from the persons who are associated
with these entities.
The business entity principle means that business is accounted for separately from its owner(s).
It also means that we account separately for each business that is controlled by the same owner.
The reason behind this principle is that different users for decision-making need separate
information about each business.

Example: If ‘R’ has invested cash of `2,00,000 in ‘R Enterprise’ then from the point of ‘R
Enterprise’ on one hand the enterprise has a cash property of `2,00,000 and on the other hand, the
it has a responsibility to return it to ‘R’ finally. In accounting terms the property is called asset
and the responsibility is called liability.
Thus the ‘separate entity’ concept helps to identify asset and liability of the business. It also helps
to look at two sides of the same transaction. Here, on one side the business ‘R Enterprise’ is able
to consider ` 2,00,000 cash as asset and on the other the same is a liability towards the owner ‘R’.
In a similar way suppose ‘K’ has agreed to lend ` 3,00,000 to ‘R Enterprise’ for some reason. Now
the property side increases by ` 3,00,000 cash while there is an additional liability towards ‘K’ let
us write these in a format. (Show the above in a T form)

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