Page 36 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes Thus, we find that in the above equations the total of assets is always equal to the liabilities.
Technically we can say that for every debit there is an equivalent credit. This relationship of
assets and liabilities is also called accounting equation.

Full Disclosure Principle

As per this principal, the financial statements should disclose true and fair view so that these
may provide accurate and sufficient information to the users of financial statements. Disclosure
principle means to give all the information relating to the economic activities of the business to
the owner, creditors and investors. Nowadays this principle is getting more importance as big
business houses are being run in the form of limited companies. As per Companies Act 1956, the
profit and loss account and the balance sheet of the company must show true and fair view of the
company. Therefore, companies are giving the foot notes regarding some items as investments,
contingent liabilities, etc., along with the balance sheet.

Matching of Cost and Revenue Principle

As per the going concern concept, the accurate profit/loss of the business can be determined at
the time of liquidation of the business or sale of the business. But it will generate a lot of
problems. Therefore, the economic life of the business is divided into different segments in
order to determine the profit/loss of the business. Generally a segment of the economic life of
the business becomes of a year. To compute the operational profits/loss of the business in a
year, it is necessary to find the expenses and revenues relating to the period. Then all the
revenues of that period are matched with all the expenses/costs incurred to earn that revenue.
This matching is called the principle of matching of cost and revenue. The results of this match
becomes as follows:
Profit = Revenue – Expenses

Herewith the matching means an appropriate association between the revenues of a period and
expenses/costs of that period. In other words the incomes/loss of the business can be determined
if the revenues (incomes) of a period are compared (matched) with the expenditure of that
period. For the recognition of the revenues/expenses the accurate system of accounting is adopted.
Therefore, a proper adjustment is also made in the accounts for the outstanding expenses, prepaid
expenses, accrued incomes and unaccrued incomes. At the time of reorganization of the revenue/
expenses, the following points are kept in mind:
1. The expenses which are being spent to earn revenue must be of the same period for which
profit is being computed.

2. Revenues/expenses of a period must be computed on the basis of accrual accounting
system.
3. If some revenues are received in advance, they must be treated as the income of that
period in which goods are supplied/services are rendered.

Objectivity Principle

It is also known as objective evidence concept. As per this principle the transactions which are
recorded in accounting must be on the objective and factual basis. There should be a voucher or
documentary evidence behind each entry in the accounting. The entry must be free from personal
bias and based on the rational approach. If the entries are made without evidence, it will lose the
confidence of the several users of the financial statements about their reliability. For the auditing
of the financial statements, there is also a need of objective evidence.

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