Accounting Principles BCOM 1st Year Long Question Answer Study Notes

Accounting Principles BCOM 1st Year Long Question Answer Study Notes
Accounting Principles BCOM 1st Year Long Question Answer Study Notes

Accounting Principles BCOM 1st Year Long Question Answer Study Notes :- In this post you will get full information related to BCOM All notes Study Material Sample Model Practice Paper Examination Paper here you will find all the questions of BCOM 1st Year This website is very helpful for all students.

Section B


Q.1. ‘Accounting conventions and concepts are foundation of accounting principles.’ Discuss this basic concept related to financial accounting. 

Ans. Accounting Concepts 

There are some assumptions on which accounting is based. These assumptions are most natural and are not forced ones. These are general motions hence they are called concepts. These concepts are also known as postulates because postulates too are necessary assumptions. A concept is a self-evident proposition, i.e. something taken for granted concepts are also termed as ground rules that govern accounting. In accountancy, following concepts are unique and popular :

1. Accounting Period Concept

Every businessman wants to know the result of his investment and efforts after a certain period. Usually one year period is regarded as an ideal for this purpose. It may be of 2 years, 6 months or 3 months also. This period is called accounting period. It depends on the nature of business and object of the proprietor of business.

Real income of business can be found out only when the business comes to an end, but this period is usually too long and no businessman can wait for such a long period for knowing its profit or loss. therefore the accounting period is mostly one year.

From the taxation point of view, one year period is necessary as income tax is payable every year. From 1st April of the current year to 31st March of the next year may be accounting year.

Effects of this Concept: These are as follows:

1. Financial position of one year may be compared with another year. 

2. Earning capacity of one year may be compared with another year. 

3. These comparisons help the management in planning and increasing the efficiency of business.

4. Proprietors and outsiders can also derive various conclusions according to their queries. 

2. Dual Aspect Concept

Accounting concept is that in which every transaction affects two accounts. This is why double entry system of bookkeeping came into existence. All business transactions are recorded on the basis of this concept. No transaction is complete without double aspect. This concept is the foundation on which the entire system of bookkeeping and accountancy is based.

Effects of this Concept: These are as follows: 

1. If one aspect of a transaction is recorded and other is ignored, the accountancy record will not indicate true position hence this concept is of great help in indicating true position of the business.

2. During recent period, when production has become very fast due to advance technology and complicated affair in large scale industries, this concept is of utmost use.

3. This concept helps in detecting the errors of employees and in having strict control over them. 

3. Money Measurement Concept

Only those transactions are recorded in books of accounts which can be expressed in money. Those transactions which cannot be expressed in money fall beyond the scope of accounting. One serious shortcoming of this concept is that the money value on that date is recorded on which transaction has taken place and later on due to inflation when changes in money value take place, these changes are not considered.

Effects of this Concept: These are as follows: 

1. In the absence of this concept, it could have not been possible to add various possessions. For example, a proprietor has 400 chairs, 10 machines, 500 acre of land and 200 tables. He cannot add them, but by finding out their value in money, total amount of all these possessions can easily be found out. 

2. Ability of the board of directors, quality of the articles produced and efficiency of workers cannot be recorded as these are not expressed in money. Thus, this concept has both merits and demerits. 

4. Realisation Concept

Every business unit spends money to purchase goods or to manufacture goods for sale. Profit cannot be earned only by manufacturer, sale of goods either for cash or on credit is essential to make earning. Without realisation of sale proceeds, there can be no profit. Revenue may be realised either for increasing an asset or it may be in the form of extinction of an existing liability. Thus, whole accountancy is based on this concept of realisation. All efforts in business are made to make utmost realisation.

Effects of this Concept: The very existence of business becomes useless without realisation and no earning can be made by the business unit. 

5. Separate Entity Concept/Business Entity Concept

Business is treated separate from its owners. All the transactions are recorded in the books of the business and not in the books of he proprietor. On the basis of this concept, the proprietor is treated as a creditor for the business. When he contributes capital, he is treated as a person who has invested his amount in the business and therefore, capital appears in the liability side of balance sheet of the proprietor’s business. Thus this concept requires to make a distinction between (i) Personal transaction and (ii) Business transactions of the entity in order to ascertain financial position and operating results of business entity.

Effects of this Concept: These are as follows: 

1. Financial position of the business can easily be found out.

2. Earning capacity of the business can easily be ascertained.

6. Cost Concept

According to this concept, fixed assets are recorded at the price at which they are acquired. This price is termed as ‘cost. In balance sheet, however, these assets do not appear always at cost price every year, but systematically it is reduced by the amount of annual depreciation and thus, they appear at the amount which is cost less depreciation. This value is called books value. Under cost concept, all such events are ignored which affect the business but have no cost. For example, the most active, important and influencial director dies, then the earning capacity and position of the business will be affected, but this even has no cost, hence it will not be recorded in account books.

Effects of this Concept: These are as follows

1. Due to cost concept, market price is ignored and balance sheet indicates financial position on cost and expired cost basis. 

2. This concept is mainly for fixed assets, current assets are not affected by it. They appear in * balance sheet at cost or market price, whichever is lower, though they two are acquired at cost price. 

7. Going Concern Concept

This concept relates with the indefinite long economical life of the business. The assumption is that business will continue to exist for unlimited period unless of course, it is dissolved due to some reason or the other. This is why balance sheet, market price of fixed assets is not considered. When final accounts are prepared, record is made for outstanding expenses and prepaid expenses because of the assumption that business will continue. If the condition of business is depreciated to such an extent that it is to be closed down, even then accountant’s concept is that business is to continue and he records all big and small transactions, he never stops making record on the possibility of closing down of business. This is the best quality of accountant which is based on this concept of going concern.

Effects of this Concept: These are as follows: 

1. Working life of assets is taken into consideration for writing off depreciation because of this concept. 

2. Whatever bad position of the business may be, it does not affect on the accounting aspect of the business. 

3. Accountant always remains hopeful about continuity of business and he does not stop writing transactions even though the condition of the business is deteriorating.