TIME INTERVAL CONCEPT
TIME INTERVAL CONCEPT, in accounting, requires that financial statements be prepared at regular intervals, e.g. monthly, quarterly, annually. Final accounts are prepared at the end of the accounting period ie one year. Internal accounts can be prepared monthly, quarterly or half yearly.
DUAL ASPECT CONCEPT
Dual aspect concept states that every transaction has two effects if there is any debit entry then there must be credit entry.
This state that there are two aspects of accounting, one represented by the assets of the business and the other by the claims against them. The concept states that these two aspect are always equal to each other. In other words, this is ...view middle of the document...
$600 is to be considered a withdrawal because only $300 (1/3rd) related to business and the other $600 was for domestic purpose.
Historical cost concept:
It states that fixed assets are always shown in balance sheet at cost price. It helps to show the true and fair value of the asset.
Accounting is concerned with past events and it requires consistency and comparability that is why it requires the accounting transactions to be recorded at their historical costs. This is called historical cost concept.
Historical cost is the value of a resource given up or a liability incurred to acquire an asset/service .
In subsequent periods when there is appreciation is value, the value is not recognized as an increase in assets value except where allowed or required by accounting standards.
1. 100 units of an item were purchased one month back for $10 per unit. The price today is $11 per unit. The inventory shall appear on balance sheet at $1,000 and not at $1,100.
It states that expected loss is never to be understated, whereas, expected profit is never to be overstated. Future losses should be recorded immediately and expected profits should not be recorded unless they are realized.
Prudence is a key accounting principle which makes sure that assets and income are not overstated and liabilities and expenses are not understated.
1. Bad debts are probable in many businesses, so they create a special contra-account to accounts receivable called allowance for bad debts which brings the accounts receivable balance to the amount which is expected to be realized and hence prevents overstatement of assets. An expense called bad debts expense is also booked to stop net income from being overstated.
It states that a business is not going to end in the foreseeable future and it has unlimited life.
Financial statements are prepared assuming that the company is a going concern which means that the company intends to continue its business and is able to do so.
The status of going concern is important because if the company is a going concern it has to follow the generally accepted accounting standards.
The auditors of the company determine whether the company is a going concern or not at the date of the financial statements.
1. An oil and gas firm operating in Nigeria is stopped by a Nigerian court from carrying out operations in Nigeria. The firm is not a going concern in Nigeria, because it has to shut down.
The concept of consistency means that accounting methods once adopted must be applied consistently in future. Also same methods and techniques must be used for similar situations.
It implies that a business must refrain from changing its accounting policy unless on reasonable grounds. If for any valid reasons the accounting policy is changed, a business must disclose the nature of change, the reasons for the change and its effects on the items...