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Chapter Contents-

Particulars Page No.

-Introduction 6
-Need & Importance of Principles & Conventions 6
-Entity & going concern principle 7
-Money measurement & cost principle 8
-Revenue recognition & objective evidence 9
principle
-Dual Aspect & Matching Principle 10
-Accrual & Accounting period concept 11
-Materiality 13
-Consistency 14
-Conservatism 15
-Full disclosure 16
-Objective Types Questions 17-26

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 Introduction:
Accounting is the language of the business. If there is no systematic approach, the
accountants may use their own language which may not be understood in the
same sense by the parties interested in such business. In order to make accounting
language a standard language, certain accounting concepts have been developed
over the years. They are the basic assumptions and these are the very foundation
of all accounting theory & practice. They are based on logical considerations &
are followed by all hence called "GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES"

Need & Importance of Accounting Principles

 It helps to keep accounting reports in
a systematic way.
 It brings uniformity in maintaining
records which help investors to
compare the financial statement of
different companies.
 Use of accounting concepts helps
accountants to follow a common
and acceptable basis of measurement
of valuation.
 Through these principles, companies can convey information to the
concerned parties in the same sense they intend to convey.
 They also help to construct valid & appropriate assumptions.

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 Key Points

Entity & Going Concern Principle:

 Entity concept, where the business is considered a separate entity from the
owner. Entity means having a distinct identity.
 Here we are believing /assuming /treating that our business is long term or
continuous i.e. it has perpetual succession & this assumption that the
business will always go on is known as the Going Concern Concept.

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Money Measurement & Cost Concept:

 Money measurement concept states that an accounting record is made of

only those transactions or events which can be measured & expressed in
terms of money.
 Cost Concept: The asset acquired by the concern is recorded in the books
of accounts at the historical cost (.e. at the price actually paid for acquiring
the asset). The market price of the asset is ignored.

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Revenue Recognition & Objective evidence concept:

 The Revenue is recognized in the period in which it is earned irrespective of

the fact whether it is received or not during that period.
 The objectivity principle states that accounting will be recorded on the basis
of objective evidence. This means that accounting entries will be based on
fact and not on personal opinion or feelings. The source document for a
transaction is almost always the best objective evidence available.

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Dual aspect & Matching Principle:

 Every transaction should have a two sided effect to the extent of the same
amount. For every debit, there is an equal and corresponding credit.
 The matching principle ensures that revenues & all their associated expenses
are recorded in the same accounting period.

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 Cash basis of accounting & Accrual Concept:

 In Cash basis of accounting, transactions are recorded as and when cash is

received or paid whereas in accrual basis of accounting revenue &
expenses are recorded as and when they are accrued/they occur & not
when they are received & paid by the business.

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Accounting Period Concept:

 Basically, this concept where an indefinite life of a business is divided into

parts or accounting periods is called Accounting Period Concept.
Accounting Period can be of one year, six months, three months, one
month, etc. But usually, companies take their accounting period to be for „a
year'.

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 Materiality:

 The concept 'materiality' suggests considering & disclosing all material facts.

Material means relatively important & Material fact means any information
which is very useful or likely to induce the decision of any interested person.

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Consistency:
 This convention suggests that once a particular policy or method is adopted
to prepare accounts or for valuation of assets, valuation of inventory,
treatment of goodwill & contingent liability & goodwill, etc. It should not
be changed unless it is absolutely necessary to change the same.

Conservatism:
 This convention refers to the “Policy of
playing safe” or “to be on the safer
side”. In other words, according to the
convention of conservatism anticipate
no profits but anticipate losses & make
provisions for the same so that there is
no adverse effect on the smooth
functioning of the business.

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Full Disclosure:

 This convention suggests that financial statements & reports must be

prepared honestly & they must disclose all material information & relevant
facts, so that interested parties like creditors, investors, proprietors & all
other interested parties get a clear view of the business.

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 Objective Type Questions

Q.1. Situational Questions

1. A company named "ABC" enterprise borrowed 50,000 in December and will make its
only payment of interest when the notes come due six months later. The total interest
for 6 months will be 3,000/- on December income statement; the accountant reported
interest expense of 600. The action is the result of which accounting principle:
A. Cost Concept
B. Revenue Recognition concept
C. Matching Concept
D. Going Concern Concept

2. Near the end of the year, "XYZ" Company required a customer to pay 100,000 as a
deposit for work that is to begin in the following year. At the end of the current year,
the company reported the amount as a liability. Which accounting guidelines prevent
the company:
A. Going Concern Concept
B. Materiality
C. Revenue Recognition concept
D. Cost concept

3. A machine costing 200,000 is depreciated over its useful life of 10 years rather than
expensing the entire amount when it is purchased. This is the principle of :
A. Cost concept
B. Matching concept
C. Revenue Recognition concept
D. Full disclosure

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4. The following data refers to Alfa Ltd:
Cost of machinery purchased on
1st April- 10,00,000
Installation charges- 100,000
Market value on 31st March- 12,00,000While finalizing accounts, if company values
machinery at 12,00,000, which of the concept is violated by Alfa Ltd

A. Cost concept
B. Matching principle concept
C. Accrual concept
D. Periodicity

5. Mr. A, the accountant of company XYZ changed the Straight line method of
depreciation to the reducing balance method, which accounting concept does this
contravene?

A. Cost concept
B. Consistency
C. Materiality
D. Periodicity

6. Mr. X, The sole proprietor of company XY does not list his personal house on the
balance sheet of company XY, which accounting principle is he following?

A. Cost concept
B. Consistency
C. Entity
D. Going Concern

7. Company A records revenue when products are delivered and services being rendered,
even though cash has not been yet received, which accounting principle is applied here

A. Cash concept
B. Accrual
C. Materiality
D. Revenue recognition

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 8. The success of the company is mainly attributed to the invaluable qualities of three
employees, X, Y & Z. However, employees X, Y & Z are not recorded as assets in the
balance sheet. Which principle is applied here?
A. Materiality
B. Money Measurement
C. Accrual
D. Revenue recognition
9. The management has decided on a twelve month financial reporting period. They
have just started on 1st January, so they will complete the twelve months reporting
period by 31st December. This is true as per which principle?

A. Cost Concept
B. Going concern
C. Accounting period Concept
D. Entity Concept

10. Profit should not be overstated and loss must not be understated, this is true as per
which concept?

A. Cost Concept
B. Consistency
C. Conservatism
D. Accounting period

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Q.2. Choose the appropriate option

1. Entry on cash and credit transaction is recorded in _______ system.

A. Cash basis
B. Accrual basis
C. Credit Transition
D. Cost Concept

2. _______ Concepts are general guidelines for sound accounting principles.

A. Materiality
B. Accounting
C. Consistency
D. Revenue Recognition

3. The immediate recognition of loss is supported by the principle of _______.

A. Matching
B. Conservatism
C. Consistency
D. Objective

4. The concept which provides a link between present and future is known as _______.
A. Going Concern
B. Cost Concept
C. Accrual Concept
D. Entity Concept

5. Accounts must be honestly prepared and they must disclose all material information is
known as _______.
A. Disclosure Concept
B. Entity Concept
C. Cost Concept
D. Dual Aspect Concept

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6. . According to which concept, the owner of a business pays „interest on drawings‟
A. Accrual Concept
B. Conservatism Concept
C. Entity Concept
D. Dual Aspect Concept

7. State the case where going concern concept is applied

A. Where an enterprise is declared insolvent.
B. Where fixed assets are purchased for use in business to earn revenue and are
not meant for resale.
C. Where fixed assets are purchased to be sold in few years
D. None of the above.

8. Following is data regarding machine purchased by Alfred Ltd.

Purchase price of machine on 1-4-14 50,000/-
Installation charges 5,000/-
Market value on 31-03-15 67,000/-
If they value machinery while finalizing accounts at 67,000 which accounting
principle are they violating?
A. Going concern Concept
B. Cost concept
C. Accrual Concept
D. Revenue recognition concept

9. The revenue recognition concept dictates that all types of incomes should be recorded
or recognized when
A. Cash is received
B. At the end of accounting period
C. As and When they are earned
D. When interest is paid

10. Loyalty of employees is not recorded as per principle of

A. Going concern
B. Monetary /Money measurement concept
C. Matching Principle
D. Entity concept

11. Information about an item is ________ if its omission or misstatement influences, the
financial decisions taken on the basis of that information.
A. Concrete
B. Immaterial
C. Complete
D. Material

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12. Accounting is a process of matching
A. Revenues and costs
B. Cash inflow and cash outflow
C. Benefit and Costs
D. Potential and Real performance

13. Which of the following is NOT TRUE?

A. Under matching principle, the expenses are matched to its related
revenues/service
B. As per revenue recognition concept, income is said to be realized when it is
received or earned.
C. As per entity concept business and its owners are not considered separate from
each other.
D. Indefinite life of a business is divided into parts, each part is known as an
accounting period.

14. For professionals, the accounting system which is more suitable is

A. Cash basis
B. Accrual basis
C. Both A. and B
D. None of the above

15. Ms. Alice purchased goods for 2, 00,000 and sold 3/4th of such goods during the
accounting period of 1 year. The market value of remaining goods was 30,000. He
valued closing stock at cost. Which concept is violated?
A. Matching concept
B. Conservatism
C. Accrual
D. Disclosure

16. Accounting policies used to prepare financial statements can be different in different
accounting periods, which concept is violated?
A. Cost concept
B. Going concern
C. Accrual
D. Consistency

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17. Which of these accounting principles is „incorrect'?
A. All important/ material information not included in the statements but which
can affect the opinion of the users must be clearly disclosed
B. We should anticipate no profit but provide for all possible losses
C. Accounting policies used to prepare financial statements can be different in
different accounting periods.
D. Business and its owners must both have separate identities.

18. If a machine is purchased for 50,000 and the useful life of machinery is 10 years then
5,000 will be shown as an expense in each year for 5 years. Which concept does this
relate to the most?
A. Cost concept
B. Conservatism concept
C. Going concern concept
D. Materiality

19. A business sold goods to Mr. Jack on 7th Dec on a credit period of 30 days. The
business recognizes this sale on 7th Dec Itself. _________system of accounting is used .
A. Cash basis
B. Conservatism
C. Accrual basis
D. None of the above

20. Concept of _________ assumes that business has perpetual succession

A. Conservatism
B. Realization
C. Going Concern
D. Accrual

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Q.3.a. Match the columns
Column A
1. Entity Concept
2. Revenue Recognition Concept
3. Cost Concept
4. Money Measurement Concept
5. Accrual Principle
6. Cash basis of accounting
7. Objective Evidence Principle
8. Going Concern Principle
9. Dual Aspect Concept
10. Matching Principle
11. Accounting Period Concept
Q.3.b.
Column A
1. Consistency
2. Materiality
3. Full Disclosure
4. Conservatism
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Column B
a. Credit Transactions
b. Source Documents
c. Cash transactions
d. Separate Existence of a Business
e. Revenue is compared with Cost
f. Every debit has an equal & corresponding
credit effect
g. Revenue recorded in the period in
which it is earned
h. Market Value will not be considered
i. Year in which financial report is
prepared
j. Feelings can‟t be measured
k. Long & Stable Life
Column B
a. To show all the material information &
relevant facts
b. Policy of playing same
c. Revenue is compared with Cost
d. Following the same method of valuation
for many years
e. Feelings can‟t be measured
f. records all relatively important fact
Q.4. State whether True or False
1. Perpetual succession is explained by the concept of entity.
2. Conservatism means to follow safe side.
3. The double entry system is based on “Dual Aspect” concept
4. Accounting records only those facts & events which are capable of being
expressed in money
5. Business entity concept is not applicable to sole trading activity
6. All facts whether material or immaterial are recorded in accounting
7. Balance sheet is prepared on the basis of cost concept & accounting
period concept
8. The purpose of consistency is to facilitate comparison
9. Revenues are matched with expenses according to matching principle
10.Unrealized profits must be considered in accounting
11. Every transaction doesn't require any evidence
12.Material information need not be disclosed in financial statement
13.Loss due to death of an efficient executive is recorded in accounts
14.Income & expenses recorded when due as per accrual concept
15.Revenue is recognized when received and not when the services
provided
16.Same items should not be treated in the same way from year to year
17.Provision must be made for anticipated losses
18.Stock is to be valued cost or market value whichever is higher
19.As per consistency principle, same accounting method should be used
from one accounting period to the next.
20. Financial statements & reports are prepared by the company don't
have to give a true & fair view of the state of affairs of the company.

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Q.5. Answer in one word
1. The concept which states that assets, when purchased, should be recorded at cost price
2. The concept which states that business operations will continue forever
3. A concept on which double entry book-keeping system is based
4. The span of the time at the end of which accounting statements are prepared
5. Concept that assumes separate existence of a business
6. Accounting convention in which all material or important information is to be
disclosed
7. Name of the concept, Wherein revenue & cost are matched to find profit of the
business
8. Accounting concept which states that every business transaction necessarily involves an
exchange
9. System in which entry is recorded for cash as well as credit transaction
10. Concept under which comparison of one accounting period with other is possible
11. Accounts must be honestly prepared & they must disclose all material information is
known as…
12. The immediate recognition of loss is supported by which convention
13. In accounting, everything is recorded in terms of money
14. Concept which applies to all business organizations
15. An accountant should follow the same rate of depreciating a particular asset year after
year based on which accounting concept/convention?

16. This convention requires a company to provide the necessary information so that
people who are accustomed to reading financial information can make informed
decisions concerning the company.
17. What helps accountants to overcome practical problems that arise out of the
preparation of financial statement?
18. Showing purchased office equipment‟s in financial statements is the application of
which accounting concept?

19. Which principle/guideline requires a company's balance sheet to report its land at the
amount the company paid to acquire the land, even if the land could be sold today
at a significantly higher amount?
20. Which principle/guideline allows a company to ignore the change in the purchasing
power of the dollar over time?

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 Answers
Q.1.

1-B, 2-c, 3-b, 4-A, 5-b, 6-C, 7-B, 8-B, 9-C, 10-c

Q.2.

1-B, 2-B, 3-B, 4-A, 5-A, 6-C, 7-B, 8-B, 9-C, 10-B, 11-D, 12-A, 13-C, 14-A, 15-B, 16-B, 17-C,
18-B, 19-C, 20-C

Q.3.a.

1-d, 2-g, 3-h, 4-j, 5-a, 6-c, 7-b, 8-k, 9-f, 10-e, 11-i

Q.3.b.

1-d, 2-f, 3-a, 4-b

Q.4.

True: 2, 3, 4, 7, 8, 9, 14, 17, 19

False: 1,5,6,10,11,12,13,15,16,18,20

Q.5.

1- Cost Concept, 2- Going Concern Concept, 3-Dual Aspect concept, 4- Accounting

Period, 5- Business entity concept, 6- Materiality Convention, 7- Matching Concept,

8- Dual Aspect Concept, 9- Accrual System, 10- Consistency Convention, 11- Disclosure
convention, 12- Conservatism, 13- Money measurement concept, 14- Entity Concept,
15- Consistency Convention, 16- Full Disclosure, 17- Accounting Conventions,

18- Materiality, 19- Cost Concept, 20- Money measurement concept

(This concept assumes that the dollar is stable over time – no inflation)

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 Hope you have enjoyed Learning

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