CPT Section A Chapter 1 Unit 2

CA. S.S.Prathap
Accounting principles are a body of
doctrines commonly associated with the
theory and procedures of accounting.
 Based on real
assumptions

Followed
Accounting consistently
principles
should be Reflect future
predictions

Informational
to users
Accounting Convention refer to the general
agreement on the usage and practices in social or
economic life.

GAAP - Generally Accepted Accounting Principles

 Accounting concepts are the foundation of
modern Accounting.

 Accounting is based on the following

concepts .
All transactions must be translated in terms of
money. If any transactions cannot be translated
in terms of money , then it cannot come in
accounts.

Example :

Loyalty of workers Skill of management

Accounts Every debit has a credit &
• double entry book keeping every credit has a debit
followed • Fundamental accounting
equation[Equity + Liabilities =
Assets]is based on dual aspect.
It is a time line starting from 1st April to 31st March

All material things which happened within these 12

months and can be measured in terms of money
must be accounted

Eg. Charging of annual depreciation to P & L a/c is a

clear example of periodicity concept
Proprietor is independent/ different from the business.

So profits earned during the year are shown as a liability

in the books of accounts.

Owner is treated as a creditor of the business, so it is the

liability of the business to return the money to the owner

Purpose: To eliminate personal transactions from

business transactions

 Capital is shown as a liability in the Balance Sheet

All future anticipated losses have to be taken into accounts BUT
no future gains can be taken into accounts without realizing it.

This concept is applied especially to closing stock.

Due to conservatism concept, closing stock is valued at

COST or MARKET PRICE whichever is lower.

Provision for bad debts is made to conservatism concept.

Profits for the year are understated due to prudence concept.

All expenses which went towards generating sales have to be
debited in the books of accounts

Any expense which was incurred but which didn't go towards

generating sales cannot be debited

Example :

Drawings A/c Closing Stock

All assets must
appear in the balance
sheet at the price for
which it was acquired
 Profits can only be booked when sale has taken place . Merely because the
value of closing stock has gone up , it doesn’t mean profits have been made.

you cannot book / record profits before you sell the goods. Only after you
sell it, you book profits.

Eg. Gold bought as Rs 1 lac. Value of gold increased to Rs 100 lacs. In the
Balance Sheet, must show the value of gold at cost and not Rs 100 lacs.
After you sell the gold for Rs 100 lacs, then only you can book profits.
All important items have to be mentioned
in account.

In the absence of materiality, wrong

decisions can be taken.

Eg. Paise can be omitted in accounts.

All expenses directly connected to a CAPITAL ASSET till it is installed
becomes part of the cost of the asset.

Pre-operating cost, Pilot Test runs (Trial runs) and Major overhauling
expenses becomes part of the cost of the asset.

Major overhauling: Buy old machine  Repair  Renovate it

Acquisition Cost (Cost of purchase) = Cost of old machine + Repairs +

Renovation Cost

Eg. Legal fees, Installation fees for machinery, Transport

charges on purchase of furniture.
 It is financial substance over legal form .

Flow of money

Example : Purchase of Land , Entire stock and business

destroyed in fire both will have to be recorded.
 Fundamental Accounting
Assumptions are part of AS – 1 ,

1 . Going
2. 3. Accrual
concern
Consistency concept.
concept
No reason for the company to
discontinue its operations in the near
future (1yr).

If Going concern is not there , all

assets will be valued at Net Realizable
Value.(Market value)
The same set of
rules have to be
followed all the time.
There are 2 types of accounting. One is cash accounting and the
other is mercantile accounting. Accrual concept is based on
mercantile accounting.

Income and expenses are recorded in the books of accounts as

and when they are due and not on receipt basis.

If an enterprise has enjoyed the facility but has not yet paid for it,
that amount should be recorded in the books of accounts.
Example : Unpaid Rent

In Accrual , the cash flow is de-linked from expenses incurred or

income earned.
 The Fundamental Accounting
Assumptions are unstated assumptions.
(i.e.,) if nothing is mentioned they
have been fully followed.
Understandability

Relevance

Reliability

Comparability

Materiality

True and fair

Substance over form

Conservatism

Revenue matching

Full disclosure

Both (a) and (b)

Answer: A
A.Conservatism

B.Cost concept

C.Going concern concept

D.Accrual concept

Answer: B
A.Going concern, conservatism , accrual

B.Going concern, matching , consistency

C.Going concern, consistency, accrual

D.Going concern, entity , periodicity

Answer : C
A. Total assets will increase

B. Total liabilities will increase

C. Total assets will decrease

D. There is no change in total assets

Answer: D
A.Going concern concept

B.Dual aspect concept

C.Money measurement concept

D. All of these

Answer: B
A. Dual aspect

B.Entity

C.Realization

D. Materiality

Answer: B
The owner of a company includes his
personal medical expenses in the
company’s income statement. Indicate
the principle that is violated.

A.Cost principle
B.Conservatism
C.Disclosure
D.Entity concept
Answer: D
A. Understandability and materiality

B. Relevance and reliability

C. Materiality and reliability

D. Relevance and understandability

Answer: B
A. Asset

B. Liability

C. Expense

D. Capital

Answer: A
A. Generally accepted accounting policies

B. Generally accepted accounting principles

C. Generally accepted accounting provisions

D. None of these

Answer: B
A. Accounting assumptions

B. Accounting conventions

C. Accounting policies

D. Accounting principles

Answer: B
A. Writing twice the same entry

B. Writing all the entries twice in the book

C. Having debit for every credit and credit for

every debit

D. All of the above

Answer: C
A. Convention of consistency

B. Convention of conservatism

C. Convention of disclosure

D. Convention of materiality

Answer: B
A.Cost concept

B.Realization concept

C.Matching concept

D.Both b and c

Answer: C
A. All prepaid assets would be completely written off
immediately

B. The allowance for uncollectible accounts would be

eliminated

C. Intangible assets would continue to be carried at net

amortized historical cost

D. Land held as an investment would be valued at its

realizable value.

Answer: D
A. Presenting accounts in a beautiful manner

B. Showing more losses to avoid income tax

C.Showing more profits to attract investment

D.All of the above

Answer: C
 Which financial statement represents the
accounting equation ?
Assets = Liabilities + Owner’s equity
 A. Income statement
 B. Cash flow statement
 C. Balance sheet
 D. Funds flow statement
ANSWER : C
A.Prudence

B.Consistency

C.Periodicity

D.Matching

Answer: C
A. Profit for the period to be matched with
sales revenue

B. Profit for the period to be matched with

investment

C.Expenses of one period to be matched

against the expenses of another period

D.Expenses of one period to be matched

against the revenue of the same period

Answer: D
A. Matching

B.Going concern

C. Double entry

D. Separate entity of business

Answer: D
A.Conservatism concept

B. Consistency concept

C. Materiality concept

D. Realization concept

Answer: C
A. Accrual concept

B. Cost concept

C. Continuity concept

D. Money measurement concept

Answer: D
A.Going concern

B.Consistency

C.Conservatism

D. Accrual

Answer: C
A.Separate entity

B.Going concern

C.Consistency

D.Time period

Answer: D
A.Assets

B.Liabilities

C.Capital

D.None of these

Answer: B
Which concept requires that only those transactions which can
be expressed in terms of money should be recorded in books of
account?

A. Business entity

B.Dual aspect

C.Money
measurement

D.None of these

Answer: C
An asset was purchased for rs.660,000. Cash was paid
rs.120,000 and for the balance Rs.5,40,000 loan was taken.
What will be the effect on fixed assets ? It will go up by_____ .

A. Rs.1,20,000

B. Rs.5,40,000

C. Rs.6,60,000

D. Nil

Answer: C
A. Drawings a/c

B. Creditor a/c

C. Capital a/c

D. Cash a/c

Answer: A
A. Net realizable value

B. Cost of purchase

C. Cost of goods sold

D. None

Answer: A
A. Periodicity concept

B. Materiality concept

C. Entity concept

D. Consistency concept

Answer: c
A. Matching

B. Full disclosure

C. Accrual

D. Going Concern

Answer: C
A. Increase in one asset , decrease in other

B. Increase in both asset and liability

C. Decrease in one asset , decrease in other

D. Increase in one asset and capital

Answer: C
A. Accrual concept

B. Conservatism concept

C. Entity concept

D. Dual Aspect concept

Answer: C
A. Materiality

B. Entity

C. Realisation

D. Consistency

Answer: C
A. Fair market value

B.Historical cost

C. Realisable value

D. Replacement cost

Answer: B
A. Liability

B. Expense

C. Asset

D. None

Answer: B
A. Consistency

B. Materiality

C. Accrual

D. Cost

Answer: B
A. Consistency

B. Convenience

C. Comparability

D. Conservatism

Answer: A
A. Realisation

B. Conservatism

C. Going concern

D. Money measurement

Answer: D
A. Consistency

B. Disclosure

C. Conservatism

D. Matching

Answer: C
In this module , we learnt

 Accounting Principles and conditions

 Accounting Conventions

 Accounting Concepts

Money measurement concept

Dual Aspect concept

Periodicity

Entity Concept

Conservatism

Matching concept
Historical Cost

Realization concept

Materiality ( significant / Important )

Capitalization

Substance over Form

Fundamental Accounting Assumptions

Going concern concept

Accrual

Consistency

Qualitative characteristics