Page 158 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 13: Critical Evaluation of Principles and Practices

Notes
R Enterprise
Property or asset (`) Responsibility or liability (`)
Cash from R 2,00,000 Towards R 2,00,000
Cash loan from K 3,00,000 Towards K 3,00,000
As a matter of practice and conventionally we could show the above as follows

R Enterprise

Liabilities Assets
R 2,00,000 Cash 5,00,000
K 3,00,000

The second one is acceptable globally. We thus introduced here how ‘one’ transaction can have
two faces just as a coin has two faces. This has its own conveniences too. It is easy to verify or
cross check in case one of them is recorded wrongly. You would notice that it helps to keep the
two sides balanced i.e. the total of each side is equal (` 5,00,000)

!
Caution In sole proprietorships and partnerships, it is difficult to separate the entity from
the owners, as there is no distinction as per the law between the financial affairs of the
partnership and the partners or the proprietorship concern and the proprietor. The
difficulties in separating the expenses of the partners or the proprietor from the concern
make it easier for them to pass on their personal expenses to the concern. This is precisely
the reason why a lot of proprietorships and partnership concerns hardly pay any income
tax.
For a company, this distinction is easier to make because company maintains separate
legal identity and its accounts correspond exactly to the scope of its activities.

13.2.3 The Going Concern Concept

Accounting records, events and transactions on the assumption that the entity will continue to
operate for an indefinitely long period of time.
Unless there is strong evidence to the contrary, accounting assumes that an entity is a going
concern. The significance of this assumption can be seen by contrasting it with another possible
alternative, i.e., that the concern would be liquidated. Under the latter assumption, accounting
should attempt to measure what the entity’s resources are currently worth to potential buyers.
The going concern concept assumes that the resources currently available to the entity will be
used in its future operations.
This helps in distributing the effects of big expenses over several periods because their benefits
also accrue over several periods.

13.2.4 The Cost Concept

Assets are always shown at their cost and not at their current market value. One of the most
fundamental concepts of accounting, the cost concept says that the asset is ordinarily entered
into the accounting records at the actual cost incurred to acquire it. Cost is measured on a cash or
equal-to-cash basis. This means if cash is given for an asset or service, its cost is measured as the

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