Explanation
Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction.
The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.The best application of this aspect is the Accounting Equation, i.e., Assets = Liabilities + Capital.
The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe.
The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated.
The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.
For example, Provision for doubtful debt is created in anticipation of bad debts etc.
In India, Standards of Accounting is issued by the Institute of Chartered Accountants of India (ICAI).
The Council of the Institute of Chartered Accountants of India constituted Accounting Standards Board (ASB) on 21st April, 1977 recognising the need for Accounting Standards in India.
The Council of the Institute of Chartered Accountants of India has so far issued thirty two accounting standards.
The money measurement concept states that a business should only record an Accounting transaction if it can be expressed in terms of money. This means that the focus of accounting transactions is on quantitative information, rather than on qualitative information. Thus, a large number of items are never reflected in a company's accounting records, which means that they never appear in its financial statement. Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in terms of money include:
In accounting, the convention of conservatism, also known as the doctrine of prudence, is a policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore lead companies to "play safe". When given a choice between several outcomes where the probabilities of occurrence are equally likely, you should recognize that transaction resulting in the lower amount of profit, or at least the deferral of a profit.
The money brought into the business by the owner is called Capital or Owner’s Equity. It is credited to the capital account. The Capital can be brought in cash or assets by the owner. Capital is an obligation of the business that has to be paid back to the owner. Because business is a separate entity from its owner. Therefore, the Capital is shown on the liabilities side of the Balance sheet. The capital account is shown after deducting the Drawings by the owner. Drawings are the amount of cash, goods or assets taken by the owner for personal use from the business.
Dual aspect is the foundation or basic principle of accounting. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places.
The duality principle is commonly expressed in terms of fundamental Accounting Equation, which is as follows :
Assets = Liabilities + Capital
In other words, the equation states that the assets of a business are always equal to the claims of owners and the outsiders. The claims also called equity of owners is termed as Capital (owners’ equity) and that of outsiders, as Liabilities (creditors equity).
The Institute of Chartered Accountants of India (ICAI) constituted the Accounting Standards Board (ASB) on 21st April, 1977 ) to harmonise the diverse accounting policies and practices in use in India. ASB of the ICAI has been issuing accounting standards.
Since then, it has issued 32 Accounting Standards.
As per AS-2, Valuation of inventories prescribed the accounting treatment for inventories and sets the guidance to determine the value at which the inventories are carried in the financial statement.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs.
The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
As per AS-2, "Inventories should be valued at the lower of cost and net realisable value."
The cost of inventories should comprise all costs of purchase, Costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
The convention of conservatism mean that the convention of caution, or the policy of playing safe. This principle requires that in the situation of uncertainty and doubt, the business transactions should be recorded in such a manner that the profits and assets are not overstated and losses and liabilities are not understated.
Closing stock being valued at cost price or Net realisable value, whichever is lower, is the best example of it.
Hence, as per AS-2 and conservatism concept, "Inventories should be valued at the lower of cost and net realisable value."
The principle of full disclosure requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes.
This is to enable the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take informed decisions.
The convention of conservatism is the convention of caution, or the policy of playing safe. This principle requires that in the situation of uncertainty and doubt, the business transactions should be recorded in such a manner that the profits and assets are not overstated and losses and liabilities are not understated. The following are some examples:
1. Closing stock is valued at cost price or Net realisable value, whichever is lower.
2. Joint life insurance policy is shown only at surrender value as against the amount paid.
3. Provision for doubtful debt is created in anticipation of bad debts etc.
4. Provision for pending law suit against the firm, which may either be decided in its favour.
The matching principle requires that revenues and any related expenses be recognized together in the same reporting period. Thus, if there is a cause-and-effect relationship between revenue and certain expenses, then record them at the same time. If there is no such relationship, then charge the cost to expense at once.
This is one of the most essential concepts in accrual accounting, since it mandates that the entire effect of a transaction be recorded within the same reporting period.
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