Application of Accounting Concepts

– Abhisek.M.Jain – 30/4/2009 Topic – Application of Accounting Concepts Application of Accounting Concepts
According to International Accounting Standard, "the enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation."
This concept assumes that a business entity has continuity of life. It will continue for a indefinite period of time. It has no need or intention to close down. This concept is important for valuation of assets and liabilities. Going concern concept influences accounting practises in relation to valuation of assets and liabilities, depreciation of the fixed assets, treatment of outstanding and prepaid expenses.
This concept makes a distinction between receipt of cash and the right to receive cash and payment of cash and the legal obligation to pay cash in relation to the revenue and expenses respectively. The accrual concept is the basis for mercantile system of accounting. While preparing financial accounts all expenses and losses pertaining to the financial period must be listed out.
The accrual concept ensures that the profit or loss shown is on the basis of full facts relating to all expenses and income.
The basic aim of the doctrine of consistency is to preserve the comparability and reliability of financial statements. According to this convention, the rules, practises and concepts used in accounting should be continuously observed and applied year after year. Comparisons of results among different accounting periods can be significant and meaningful only when consistency practises were followed in ascertaining them. Consistency can be of three levels – vertical, horizontal and dimensional.
Consistency serves the basis for eliminating personal bias, whims and fancies of the accountants.
Materiality means ‘relative importance’. All important items and facts should be disclosed in accounting statements. Unimportant and immaterial details need not be separately given. Otherwise, the accountant becomes over burdened with unnecessary details.
According to American Accounting Association, "an item should be regarded as material if there is a reason to believe that knowledge of it would influence the decision of informed investor."