Very Short Question Answer
What is materiality convention of accounting?
Materiality concept of accounting is an accounting convention that refers the relative” importance or significance of an item to a decision maker. The materiality concept of accounting guides about recognition of a transaction. It means that transactions which is of insignificance importance should not be recorded. A transaction may be recorded keeping in view its relevance and importance.
What do you understand by business entity concept?
According to this concept, the business and the owner are said to have distinct identities and they should be treated as separate legal entities. This makes possible to record only the transactions of the business.
What is meant by going concern concept?
While recording business transactions in the books of accounts, it should be assumed that business will be carried on indefinitely. This is why, the business purchases fixed assets instead of hiring them. Consequently, the treatment of purchase of goods is differentiated from the purchase of assets. It is obligatory for every accountant to treat business activity as a continuing process and record transactions accordingly.
What is meant by realization concept?
In the business concern, revenue is earned either by selling goods or by rendering service. Revenue is earned only when the seller sells the goods to the buyer. So, revenue should be realized at the time when it is actually earned no matter, it is actually received or not. So, this concept is also called revenue concept.
Write in brief about money measurement or monetary concept.
According to this assumption, accounting should record only those facts that can be expressed in terms of money. This concept imposes a severe limitation on the scope of accounting report. For example, accounting does not record the fact that a competitor has introduced a better product in the market or that one of the efficient Marketing Managers has resigned from his post.
Write short note on matching principle.
Matching principle revolves around the determination of the point of time when revenue is earned. A business firm invests money to purchase or manufacture goods for sale. To earn profit, sales have to be made. There can be no profit without realization of proceeds. This principle is important in ascertaining the exact profit earned during a period in a business concern.
Give the meaning of accounting period concept.
According to this concept, the economic life is divided into different periods for preparing financial statements. Usually, a period of one year is considered as the accounting period.
Long Question Answer
Define GAAP. Explain in brief the features of GAAP.
Generally accepted accounting principles (GAAP) are basic accounting principles and guidelines which provide the framework for more detailed and comprehensive accounting rules, standard and accounting practices. The principles of GAAP are established by the International Accounting Standard Board.
There are four fundamental features of GAAP:
- Relevance: GAAP states that financial statements should provide relevant information.
- Reliability: All information must be free of error and bias. Information must be objective and be verifiable.
- Understandability: Readers of the financial statements must be able to understand the reports.
- Comparability: A company’s financial statements should be comparable from year to year.
What do you mean by accounting standard? Explain the need/significance of accounting standard.
Accounting standards are common set of principles, standards and procedures. They define the basis of accounting policies and practices. They improve the transparency of financial reporting in all countries.
Need/significance of accounting standard are as follows:
- Uniformity in accounting: Accounting standards help to achieve uniformity in accounting.
- Improves reliability of financial statements: Accounting Standards ensure that the statements are reliable and trustworthy.
- Prevents frauds and manipulations: Accounting standards provide the accounting principles that all entities must follow.
- Comparability: Since all organizations follow the same set of standards, their financial statements are comparable to each other.