The document discusses key accounting concepts and principles including: 1) The convention of conservatism which requires recognizing losses but not profits until realized. Creating provisions for unrealized profits violates this principle. 2) The materiality concept requires separate disclosure of items that could impact users' decision making. Rounding of small amounts does not meet this threshold. 3) The business entity concept treats the business and its owners as separate entities, with shareholders viewed as creditors for capital invested. 2) The document also discusses accounting standards related to inventories, cash flows, depreciation, and revenue recognition among other topics. Key concepts like going concern, consistency, and accrual are explained.

1. Theoretical Framework 2010
Q.1 According to Convention of Conservatism, provide for expected and all possible losses,
but do not provide for expected or anticipated Profits , provide for Profits as & when
they are Realised only.
Creating Prov. For Discount on Crs. Is a profit which is not Realised is against the Convention of
Conservatism.
Q.2 According to Materiality Concept events which will effect the decision making
of the user of the Financial Statement should be disclosed seperately.
Rounding up of Paise will not effect the decision of the user of the Financial
Statement ,
Q.3
According to Business Entity Concept , the Business and the Owners of the business
are treated as two different persons or two different entities .
The Shareholders are treated as Creditors for the amt. they have paid on Subscribed Capital
Q.4 According to Money Measurement Concept events which can be expressed in money's worth
are only shown in books of Accounts.
Non-Financial transactions are not recorded in the Books of accounts .
Q.5 Three Fundamental Accounting Assumption are:
1. Going concern
2. Consistency
3. Accrual
Q.6 According to Going Concern Concept an Entity is expected to have an indefinite exsitence.
& hence all the Assets are classified into Current Assets or Fixed Assets or Current Liabilities
or Short term or Long term Liabilities.
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2. Theoretical Framework 2010
Q.7
Valuation of Inventories AS-2
Revenue Recognition AS-9
Depreciation Accounting AS-6
Disclosure of Accounting Policies AS-1
Q.8 eg: Wages paid for installation of New Machinery debited to Wages Account.
Will decrease the Profit & also
Will understate the value of Machinery in B/S .
Q.9
Valuation of Inventories AS-2
Cash Flow Statement AS-3
Depreciation Accounting AS-6
Disclosure of Accounting Policies AS-1
Q.10
According to Business Entity Concept , the Business and the Owners of the business
are treated as two different persons or two different entities, and hence the Owner/Shareholders
are treated as Creditors for the amt. they have paid on Subscribed Capital
Q.11 According to Convention of Conservatism, provide for expected and all possible losses,
but do not provide for expected or anticipated Profits ,only provide for Profits as & when
they are Realised only.
Q.12 According to Going Concern Concept an Entity is expected to have an indefinite existence.
& hence all the Assets are classified into Current Assets or Fixed Assets or Current Liabilities
Or Short term or Long term Liabilities.
Hence Prepaid Expenses are treated as Current Assets.
Q.13 According to Full Disclosure Principle , if there is any change in the Accounting Polocies the same
should be disclosed in the form of Notes explaining the reason and justification for the Change &
also the effect of the changes on the Financial Statements .
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3. Theoretical Framework 2010
According to Materiality Concept an Event should be disclosed only if it effects the decision making
capacity of the persons using the Financial Statements, if it does not affect the decision making capaci
of the persons using the Financial Statements ,it need not be disclosed separately .
Q.14 According to Cost Concept all the Assets should be recorded at cost in the Books of Accounts
and not at the Net Realisable Value of the Asset, as it is assumed that the Asset will be used in
the Business and is not meant for sale.
Hence Fixed Assets should be recorded at cost.
Q.15 According to Going Concern Concept an Entity is expected to have an indefinite existence.
& hence all the Assets are classified into Current Assets or Fixed Assets or Current Liabilities
or Short term or Long term Liabilities.
Liquidation value is taken only when it is assumed that the business will be wound up.
Q.16 According to Going Concern Concept an Entity is expected to have an indefinite existence.
& hence all the Assets are classified into Current Assets or Fixed Assets or Current Liabilities
or Short term or Long term Liabilities.
All the Fixed Assets are valued at cost and not at Net Realisable value, but if this assumption
is not valid then F.A will be valued at Net Realisable value .
Q.17 According to Matching Concept all the expenses incurred for the accounting period to earn the
Revenue of the Period should be taken in Books of Accounts irrespective whether the expenses
are paid or whether the Revenue is received in that Accounting Period.
According to Matching Concept the value of intangible assets should be amortised
or written off in the period to the extent the same is used to generate the Revenue of that period.
Q.18
According to Convention of Conservatism, provide for expected and all possible losses,
but do not provide for expected or anticipated Profits ,only provide for Profits as & when
They are Realised only.
Creating Prov. For Discount on Crs. Is a profit which is not Realised
Q.19 According to Cost Concept all the Assets should be recorded at cost in the Books of Accounts
and not at the Net Realisable Value of the Asset, as it is assumed that the Asset will be used in
the Business and is not meant for sale.
Hence Fixed Assets should be recorded at cost.
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4. Theoretical Framework 2010
Q.20
According to convention of Conservatism , Stock should be valued at Cost or Net
Realisable value, whichever is lower.
Value of Cl. = Purchases+Expenses+N.P-9/10Sales
5,00,000+25000+75000-9/10(6,00,000)=60,000
Value of stock at cost=9/10*5,00,000=54,000.
Q.21
As per Business Entity Concept only the Properties belonging to business will be
shown in the Books of Accounts of the Business and the Personal Assets of the
Businessman will not be recorded in the Books of Accounts of the Business.
According to Business Entity Concept , the Business and the Owners of the business
Are treated as two different persons or two different entities.
Q.22
According to Accrual Concept the expenses and the income of the Accounting year should
be shown in the same Accounting year , irrespective of whether the same has been paid or the same
has been
Released in the same Accounting Year.
Q.23 According to Going Concern Concept an Entity is expected to have an indefinite existence.
& hence all the Assets are classified into Current Assets or Fixed Assets or Current Liabilities
Or Short term or Long term Liabilities.
Liquidation value is taken only when it is assumed that the business will be wound up.
Dual -Aspect Concept: According to this Concept each transaction has two aspects.
eg: If an Asset is purchased, it may result in any one of the following :
Q.24 1) Decrease in other Asset (i.e. by payment)
2) Increase in Liability (i.e. Asset purchased on Credit, Amt. still Payable.)
3) Increase in Capital (i.e. Proprietor has contributed money for purchase of Asset).
Accounting Equation
Assets = Equity + Liabilities
Fixed Assets+Current Assets = Equity+ Long Term Liabilities + Current Liabilities.
Q.25 eg: Increase in Creditors will also increase the value of Stock.
Increases in Loan taken will increase either Bank/Cash balance.
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5. Theoretical Framework 2010
Q.26 Consistency Concept : Various accounting practises should remain the same
from one year to other year.
If accounting practises are followed year after year it will help for intra-firm
comparasion and inter-firm comparision .
Read these Accounting Standards Properly
Disclosure of Accounting Policies AS-1
Valuation of Inventories AS-2
Cash Flow Statement AS-3
Depreciation Accounting AS-6
Accounting for Research & Development AS-8 Discontinued
Revenue Recognition AS-9
Accounting for Fixed Assets AS-10
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