Explanation
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.
Hence, the above statement is true.
The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the books 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.
The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use.
For example, an old plant was purchased for Rs. 50 lakh, which is into the business of manufacturing detergent powder. The following were the other expenses incurred for its installation:
1. Transporting the plant to the factory site- Rs. 10,000
2. Repairs for bringing the plant into running position- Rs. 15,000
3. Installation- Rs. 25,000
The total amount at which the plant will be recorded in the books of account would be the sum of all these, i.e. Rs. 50,50,000.
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