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Paper 1 Principles and Practices of Accounting Theoretical Framework 1.19

Mr Deepak

Takes Loan Repays Loan
(Increase in Liability) (Decrease in Liability)

To Repay By Getting By Personal
Old Loan Got Cash Another Loan Cash
(Decrease (Increase (Increase (Decrease
in Asset)
in Liability) in Liability) in Asset)

Fig. 1.7 Decrease in Liabilities

ƒ If he sells the asset to a person whom he owes money, this will result in a decrease
in liability.
ƒ If he sells the asset in cash, this will result in an increase in asset.

Figure 1.7 depicts Mr Deepak taking a loan. This results in an increase in liability.
This will result in two aspects

ƒ The loan has been taken to repay an old loan. This will result in a decrease in liability.

ƒ The loan has been taken in cash. This will result in an increase in liability.

Assume Mr Deepak repays loan. This will result in decrease in liability.

ƒ If the loan is repayed by taking another loan. The taking of another loan will result in
an increase in liability.

ƒ If the loan is repayed by cash, this will result in a decrease in asset.

Equity (E) + Liabilities (L) = Assets (A)

1.12.10 Conservatism

This concept states that an accountant should not anticipate any future income, how-
ever, they should provide for all possible losses. When there are many alternate ways
through which value of an asset can be determined, the method which leads to the lower

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