FAA Quiz Prep – Chapter 1,2,3
Capital Maintenance - The idea of capital maintenance ensures that the
capital consumed in the business is fully recovered from the revenue.
Income should be measured as the excess of capital, over capital at the
beginning of the year, so that there is no chance of capital erosion by the
way of withdrawals out of such capital.
Productive Capital – Productive capital refers to the physical and
tangible assets used for producing goods and services. E.g.- Tools,
machinery etc.
Profitable Operations – Productive capital being used on a large scale
for economic activities, the operations of a business are focused on profits.
Measurement – Measurement is the assignment of numbers to objects or
events and also assigning numbers to represent qualities.
Duality of Value – It implies that there is a benefit as well as sacrifice
aspect involved in every transaction. It means debit and credit of every
transaction
Value – In financial accounting value is used to mean the value in
exchange.
Objectivity – Implies freedom from bias of the valuer. Which means that a
value of an object is not dependent on the buyer, a group of independent
of observers would arrive at a consensus to determine the value.
Historical Cost – This is the cash or cash equivalent actually paid.
Current Cost – This is the cash or equivalent to be paid for a current
acquisition.
Net Realizable Value – Cash or equivalent expected to be received for
an item in due course of business.
Present Value – This is the value of an amount today, of some future
payment to be paid or received later, discounted at some interest rate.
Generally Accepted Accounting Principles (GAAP) – It’s a
combination of standards and accepted ways of doing accounting.
ASB and ICAI – The Accounting Standards Board of the Institute of
Chartered Accountants of India is the body entrusted with work of
preparing the standards in India.
Property Rights – In the context of accounting, this implies that the
things of value to an entity can be transferred from one entity to another.
Basic Accounting Concepts -
1. Entity Concept – Accounts are kept for entities, as distinguished from the
persons who are associated with these entities. An entity is any
organization or activity for which accounting reports are prepared.
2. Going Concern – This is the assumption that business entities have a life
of infinite duration.
3. Money Measurement Concept – This concept states that a record is
made only of information that can be expressed in monetary terms.
Money becomes a common denominator by means of which facts about
an entity can be expressed.
4. Cost Concept – Cost Concept states that when an asset is recorded,
initially it is recorded at the price it was purchased. For non-monetary
assets, such as goodwill, the real value of the asset may change with the
passage of time, accounting for such assets is generally done only when
required. E.g. – Goodwill of a business is only recorded at the time of
liquidation of a business.
5. The Dual-Aspect Concept – This concept states that every transaction
in accounting has two equal and opposite effects, impacting at least two
accounts.
a. Account Categories – Even though every individual asset or
liability can be recorded separately, it is more practical to record
them under specific labels. This concept is called Account
Categories Concept.
b. Current Ratio – The ratio of current assets to current liabilities is
called Current Ratio.
6. Conservatism Concept – Conservatism Concept asks us to express
caution while recording information. It means that when faced with
uncertainty or alternative accounting treatments, accountants should
choose the method that is less likely to overstate assets or income and
less likely to understate liabilities or expenses. (Basically, record items
only when there is certainty of them happening.)
7. Realization Concept – Realization Concept states that revenue should be
recorded only when it is earned, regardless of when the cash is received.
For example – If a business sells a toy worth ₹500 on credit today, the
transaction should be recorded at that time regardless of when the
payment comes through.
8. Accounting Period - The accounting period concept dictates that a
business's continuous operations are divided into specific, shorter
timeframes for financial reporting.
9. Matching Concept - The matching concept in accounting dictates that
expenses should be recognized in the same accounting period as the
revenues they help generate, regardless of when the cash transactions
occur.
10.Consistency Concept - The consistency concept in accounting dictates
that once a company selects a specific accounting method, it should
consistently apply that method in future accounting periods. For example
– If a company chooses to record depreciation using straight line method
in Year 1, they cannot switch to written down value in Year 2, this violates
consistency.
11.Materiality Concept - The materiality concept in accounting dictates
that only information significant enough to influence the decisions of
financial statement users should be included in the financial reports. For
example – If a company buys a stapler or any stationery, it shouldn’t
record it as an asset since it isn’t significant enough to affect the workings
of the business. It should be recorded as an expense instead.
