Page 32 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes The classification of accounting principles is shown in the following figure:
Figure 2.1: Classification of Accounting Principles

(i) Separate Business Entity
Basic Accounting (ii) Going Concern
Assumptions (iii) Money Measurement Concept
(iv) Accounting Period

(i) Revenue Reorganization Principles
(ii) Cost Principle
Basic Principles (iii) Dual Aspect Principle
Accounting
(Concept) (iv) Full Disclosure Principle
Principles
(v) Matching of Cost and Revenue Principle
(vi) Objectivity Principle
(i) Conservatism
(ii) Consistency
Modifying Principles (iii) Timeliness
(Conventions) (iv) Materiality
(v) Cost-Benefit Principle
(vi) Industry Practices

2.2.1 Basic Accounting Assumptions

The owner and business are treated as two distinct entities and we record those view point of
business.
1. Separate Business Entity: As per this assumption, business is considered a separate entity
from its owner(s). This assumption helps in keeping the business transactions strictly free
from the effect of personal affairs of the owner. For instance, when a person start the
business with cash of 2,00,000 then this amount increases the balance of cash from the
point of business and on the other hand the owner is treated as a liability and this is shown
in the liability side of the balance sheet as owner’s capital. For this transaction this journal
entry is passed:

Cash A/c Dr. 2,00,000
To Owner’s Capital A/c 2,00,000
This concept is becoming more popular because in one sense capital itself may be regarded
as a liability—the amount due from the business to the owner. This concept is applicable
to the all forms of business organizations whether it is a limited company, partnership
firm or a sole trader.
2. Going Concern Concept: As per International Accounting Standards, it is a fundamental
accounting assumption underlying the preparation of financial statements. Under this
assumption, “the enterprise is normally viewed as a going concern, that is, as continuing
in operation for the foreseeable future. Under this all assets are shown at cost price and not
at market price and depreciation is provided on cost price in order to calculate true profit.
It is assumed that the enterprise has neither the intention nor the necessity of liquidation
or of curtailing materially the sale of its operations”. Under this assumption the assets of
the business are valued by the accountants on the basis of going concern concept, historical
cost and expected life of the assets.
3. Money Measurement Concept: Money is medium to value quantities. As per this assumption,
only those transactions of the business are recorded in the accounting which can be measured

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