Question:- Describe the following Accounting principle

with practical examples ?

 Consistency Concept
 Accounting Period Concept
 Going Concern Concept
 Revenue Recognization Concept
Answer:-
 Consistency Concept
 If an asset is depreciated on diminishing balance method in one year , the same method of
depreciation be adopted in other year also this is consistency.
 Continuance of one practice in number of year indicates consistency.
 The concept of consistency means that accounting methods once adopted must be applied
consistently in future also same methods and techniques must be used for similar situations.
 Consistency concept is important because of the need for comparability that is enables
investors and other users of financial statements to easily and correctly compare the financial
statements of a company.
 Example:- Company X has been using declining balance depreciation method for its
IT equipment. According to consistency concept it should continue to use declining
balance depreciation method in respect of its IT equipment in the following periods.
If the company wants to change it to another depreciation method, say for example
the straight line method, it must provide in its financial report, the reason(s) for the
change, the nature of the change and the effects of the change on items such as
accumulated depreciation.
 Accounting Period Concept
 Every business man wants to know the result of his investment and efforts after a certain
period.
 Usually one year priod is regarded as an ideal for this purtpose it may be of 2 years , 6
months or 3 months also this period is called Accounting Period .It depends on the nature
of business and object of he proprietor of business.
 In terms of taxation point of view one year period is necessary as income –tax is payable
every year from 1st April of the current year to 31st March of the next year may be
accounting year.
 It may also help to compare the financial position of the current year from the next year.
 Earning capacity of one year may be compared with another year.
 These comparisions help the management in planning and increasing the efficiency of
business.
 Example:-
 Going Concern Concept
 Going concern concept is a simple but very important financial accounting principle which
stipulates the basis on which financial statement are prepared depending on the likelihood of
the company continuing its normal course of business.
 The assumption that a business is expected to continue in future affects the timing, nature
and amount on which accounting transactions are recorded.
 General purpose financial statements are prepared assuming that the company can and will
continue its business in the future.
 Going concern concept is closely linked with business entity concept, materiality
concept and historical cost concept.
 Example:- The Small company is unable to make payments to its creditors due
to a very weak liquidity position. The court grants the order of liquidating the
company upon the request of one of the company’s creditors. The company is no
longer a going concern because sufficient evidence is available to believe that the
company cannot continue its operations in future.
 Revenue Recognition Concept
 Revenue recognition principle tells that revenue is to be recognized only when the rewards
and benefits associated with the items sold or service provided is transferred, where the
amount can be estimated reliability and when the amount is recoverable.
 The revenue recognition principle states that revenue should be recognized and recorded
when it is realized or realizable and when it is earned. In other words, companies shouldn't
wait until revenue is actually collected to record it in their books. Revenue should be
recorded when the business has earned the revenue. This is a key concept in the accrual basis
of accounting because revenue can be recorded without actually being received.
 Example:-
 A telecommunication company sells talk time through scratch cards. No revenue is
recognized when the scratch card is sold, but it is recognized when the subscriber
makes a call and consumes the talk time.
 A media company recognizes revenue when the ads are aired even if the payment is
not received or where payment is received in advance.
Question:- Discuss the concept of Operating Cycle.
Answer:-
GAAP requires that assets and liabilities must be broken out into current and non-current
categories on a balance sheet. This allows the financial statement user to see what assets will
be used and what liabilities will come due in the current year or current operating cycle.
An operating cycle is the amount of time a company spends between spending money operating
activities and collecting money from the same operating activity. Operating cycle often focus
on the purchase and sale of assets. For instance a retailer's operating cycle would be the time
between buying merchandise inventory and selling the same inventory. A manufacturer's
operating cycle might start when the company spends money on raw manufacturing
materials to make a product. The operating cycle wouldn't end until the products are
produced and sold to retailers or wholesalers.
Operating cycles are important because they determine cash flow. If a company is able to keep a
short operating cycle, its cash flow will consistent and the company won't have problems
paying current liabilities. Conversely, long operating cycle means that current assets are not
being turned into cash very quickly. In other words, cash is not being collected from
customer very quickly. Companies with longer operating cycles often have to borrow from
banks in order to pay short term liabilities. These companies are often less profitable because
of these extra loans.
Thank You