Question

QUESTION 8 Choose 3 of the assumptions and principles that are used in financial reporting and explain why they are important and give 1 real life example of each for when they would apply. T T T Arial • 3 (12pt) • T i Path: P Words:0

Answer 1

finnial Reporting The prooss of producing stakrants is that disclose a businesses final status to management, investor and the government brown as final reporting. The three major finorial statement reports are balance sheet income statement, statement of cash flows: Assumptions and principles that are used in financial semestiny's 1. hairy concern assumption As for this wreeft it is assumed that the busives will continue exist for a long period in the future The transactions are recorded books on the assumption that it is a continuing enterprise for exemple if a machinery is purchased which would last day for the next lozears, the cost of this machinery will be spread over the next lozers for calculating the rat profit of each lose because of going wners concept that outside porties enter into long -term contracts with enterprise. Another exemple of this wheept is that prepaid realisable value ore shown in the balance sheet, because the will be benefit of such exhorses received in future no etherses, which have as assets

Page No. Date 1 1 lost loreept on Historical lost concept alset is According to this concept, an ordinily rewriced books of accounts at the price at which it was acquired. The of voluation of the assets cost is the basis in the finchial statements. for & temple if business entity purchases a biling for A 20,00,000, it would be recorded books at this figure. Subsequent inreose decrease market value of the building recorded in the books of accounts. 022 be of two you later the market value of the building shoots un to pr. 60,00,000, the breased not be ordinarily recorded in the books of accounts. be contrmarly However the cost creept on historical rent doesn't mech that shown at their acquisition price for as log business entity owns them. cost is systematically reduad from year to assets are balance sheet at cost bus year by charging depreciation and the shown depreciation,

Dual aspect concept According to is recorded words, every this concept every business traction as having a duel ospect. In other transaction affects otheast two accounts. is delited, any other account must be account credited. The system of recording trossections based on this principle is called as Double Entry Syren". Assets - Liabilities & Chital OR hopital Assets - Liabilities for exemple x consores business with f. 20 lakh incesh and tokes a been of Rs. slakh from the books these R. 25 lohh are used in buning some assets, say Plant and Machinery. The equation will be of follos- Assets : 725 lakh Liabilitis & cofitel f. slabh + R. 20 lakh Wherever a trascetih is be rewrited, it has be recorded turo or more ourns to balore the equation