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1.16 Theoretical Framework Principles and Practices of Accounting Paper 1

EXAMPLE 1.3

Assume Aarthi Ltd has agreed to pay sales commission to Mr Mohit as and when the
receipt from sales is received. The total sales are ₹ 10,00,000 in the year 20X1. The
amount is received in the year 20X2. Therefore, the sales commission is paid in the
year 20X2. When will the sales commission be booked as an expense?

Answer: As the revenue is booked in the year 20X1, sales commission will also be
booked in the year 20X1 according to matching concept.

1.12.6 Going Concern

The financial statements are prepared normally on the assumption that an organisation is
a going concern and will continue its operation for the foreseeable future. The assump-
tion is such that the organisation has neither the intention nor the need to liquidate or
curtail materially its scale of operations. If the entity intends to liquidate or the need
exists, the financial statements are prepared on a different basis other than going con-
cern and if used the basis needs to be disclosed.
The valuation of assets of an organisation is dependent on this assumption.

Mnemonics
The three fundamental accounting assumptions are —

ƒ Going Concern

ƒ Consistency

ƒ Accrual

GCA – Great Chartered Accountant

1.12.7 Cost Concept

The value of an asset is to be determined on the basis of historical cost, also known as
acquisition cost. It is highly objective and free from any bias. Other measurement bases
are not so objective.

Limitations

1. May not work in inflationary situation

2. Many assets do not have acquisition cost (e.g. human resources)

3. Historical valuation loses comparability (e.g. if Mr Sai Vijai has purchased a ma-
chinery in 1990 which generates an inflow of ₹ 50,000 currently. Mrs Aarthi has
purchased a similar machinery costing ₹ 5,00,000 and she also generates an inflow
₹ 50,000. Now which one is more efficient? The same cannot be compared.
Therefore, this results in loss of comparability.)

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