ACCOUNTING PRINCIPLES

ACCOUNTING ASSUMPTIONS:
A) Basic Assumptions of accounting:
1) Going Concern:
This assumption states that while recording any transaction in the books of accounts, we
should assume that business will be carried on for a long period of time. If an accountant
has reason to doubt the ability of a business to continue as a going concern and meet its
obligations and protect its assets, they are duty-bound to include this in their audit report.
This is the reason why business purchases fixed assets (instead of hiring them). Reason
for differentiating purchase of goods with purchase of assets is because of this
assumptions.
2) Consistency:
This assumptions states that any accounting concepts/policies used in one financial year
shall be applied consistently in future. It means all the transactions or events shall be
recorded in same manner from one accounting year to another. Example: if company
used WDV method of depreciation in the F.Y. 2076-77, it should use WDV Method in F.Y.
207-78 as well. This is because it helps in comparing the results of two or more financial
years.
3) Accrual Basis:
This is the most fundamental assumption of accounting. It states that all the transactions
ahll be recorded in books of accounts at the time such transactions are actually made and
not at the time of receipt or payment of cash/bank. The method follows the matching
principle, which says that revenues and expenses should be recognized in the same
period. Under accrual accounting, firms have immediate feedback on their expected cash
inflows and outflows, which makes it easier for businesses to manage their current
resources and plan for the future.

B) Other important concepts of accounting:

1) Matching Concept:
This concepts explains that for every revenue booked in a particular year corresponding
expenses that are made for realizing that revenue must also be recorded in that particular
year. The matching principle is based on the cause and effect relationship. If there’s no
cause and effect relationship, then the accountant will charge the cost to the expense
immediately.
2) Business Entity concept:
This concept states that, business and owner are two distinct persons and shall be treated
separately. Hence, the transactions associated with a business must be separately
 recorded from those of its owners or other businesses. Doing so requires the use of
separate accounting records for the organization that completely exclude the assets and
liabilities of any other entity or the owner.
3) Money Measurement:
According to the money measurement concept, accounting should record all those facts
and figures which can be measured in money. This concept gives rise to the severe
limitations of accounting. Say, accounting doesn’t record the fact that competitor has
launched a business plan which is likely to increase company’s market share.

C) OTHER IMPORTANT TERMS (CONVENTION) IN ACCOUNTING:

1) Conservatism:
This concept defines that while recording transactions in books of accounts, losses
shall be anticipated if there is probable chance and incomes and gains shall be
anticipated once they are earned. This concept explains that profit shall be recorded
once relaised and for any loss or expenses proper provision shall be made so as to
cover all the losses.
2) Periodicity
This is the concept related to the accounting period. As per this concept, though
accounting is made on the going concern basis, it is not practicable to wait for such a
long period for determination of his P&L. Hence it shall be prepared for each
accounting year. Accounting year for Nepal ranges from Shrawan 1st to Ashad end.

3) Full Disclosure:
As per this concept, financial statements shall disclose all material facts and about the
financial information in order to show the true and fair picture of the financial position
of the entity.
 MCQS FOR ACCOUNTING PRINCIPLES:
1) Accounting Principles that states company and owner shall be accounted for separately
is:
a) Business entity Concept
b) Monetary Concept
c) Matching Concept
d) Going Cocern

2) Companies not disclosing an immanent bankruptcy would violate the:

a) Business entity Concept
b) Monetary Concept
c) Matching Concept
d) Going Concern

3) Switching accounting principles every year would violate the:

a) Materiality Concept
b) Conservatism Concept
c) Consistency Concept
d) Historical Cost Concept

4) Management concealing important financial information violates the:

a) Materiality Concept
b) Monetary Concept
c) Periodicity Concept
d) Full Disclosure Concept

5) Recording expenses and revenues in the same period in which they occur.
a) Historical Cost Concept
b) Monetary Concept
c) Matching Concept
d) Periodicity Concept
6) That companies can present useful information in shorter time periods such as years,
quarters, or months is:
a) separate entity concept
b) monetary measurement concept
c) going concern assumption
d) time period assumption

7) Which of the following does not accurately represent the accounting equation?
a) Assets – Liabilities = Stockholders’ Equity
b) Assets – Stockholders’ Equity = Liabilities
c) Assets = Liabilities + Stockholders’ Equity
d) Assets + Liabilities = Stockholders’ Equity

8) Accounting provides information on:

a) Cost and benefit for managers
b) Company’s tax liability
c) Financial conditions of an entity
d) All of the above

9) The long term assets that have no physical existence but are rights that have value is
known as:
a) Current Assets
b) Fixed Assets
c) Intangible Assets
d) Investments

10) The accounts that records expense, losses, gains and losses is:
a) Personal account
b) Real account
c) Nominal account
d) None of the above

11) Real Accounts records:

a) Dealings with creditors and debtors
b) Dealings with commodities
c) Gains and losses
d) All of the above