IGNOU ECO-02-Accountancy, Latest Solved Assignment (July 2023 - January 2024 )
Q3) Write notes on the following concepts:
a) Going Concern Concept
b) Conservatism
c) Consistency
d) Materiality
Ans. (a) Going Concern Concept:
The going concern concept is the belief that a company will continue to operate for some time to come. On the other hand, this implies that the corporation won’t have to immediately stop operations and sell off its assets at what might be extremely low fire sale rates. By assuming this, the accountant is justified in delaying the recognition of some expenses to a later period, when it is presumed that the entity will still be operating and making the best use of its assets.
If a company is no longer a going concern, it must start reporting certain information on its financial statements.
It is an important function for a business as it makes it very clear how the business should manage its expenses or commitments to ensure its resources are efficiently managed.
It is done by minimizing profits by stating uncertain losses or expenses and not mentioning unknown or estimated gains. It always indicates that a more conservative estimate should always be followed.
(b) Conservatism:
The conservatism principle is the general concept of recognizing expenses andliabilities as soon as possible when there is uncertainty about the outcome, but toonly recognize revenues and assets when they are assured of being received.
Under the conservatism principle, if there is uncertainty about incurring a loss, you should tend toward recording the loss. Conversely, if there is uncertainty about recording a gain, you should not record the gain.
The purpose of the conservatism principle in accounting is to understate the revenues and values of a business’s assets. This function helps protect investors, creditors, and business managers from inflated earnings numbers so they can make more informed decisions.
Conservatism Principle of Accounting guides the accounting, according to whichin case there exists any uncertainty. All the expenses and the liabilities shouldberecognized. In contrast, all the revenues and gains should not be recorded, andsuch revenues and gains should be recognized only when there is reasonable
certainty of their actual receipt
(c) Consistency:
In accounting, consistency requires that a company’s financial statements follow the same accounting principles, methods, practices and procedures from one accounting period to the next. This allows the readers of the financial statements to make meaningful comparisons between years. In accounting, consistency requires that a company’s financial statements follow the same accounting principles, methods, practices and procedures from one accounting period to the next. This allows the readers of the financial statements to make meaningful comparisons between years.
Consistency does allow a company to make a change to a more preferred accounting method. However, the change and its effects must be clearly disclosed for the benefit of the readers of the financial statements.
The Financial Accounting Standards Board refers to consistency as one of the characteristics or qualities that makes accounting information useful.
The consistency principle states that once a company adopts a certain accountingpolicy or method, it must be applied consistently in the future as well. This means that similar events and transactions over time will have the same accounting
treatment.
It is highly discouraged that a company uses one accounting method in the current period, a different method in the next period and so on. The consistency principle requires that companies have a consistent set of policies and standards that are used while preparing the financial statements. This will ensure consistency of information given to users of the financial statements like creditorsn and investors.
Auditors are especially concerned that their clients are reporting the financial statements following the consistency principle. This makes the results from period to period comparable for the users of those financial statements including investors and creditors.
(d) Materiality:
Materiality concept in accounting refers to the concept that all the material items should be reported properly in the financial statements. Material items are considered as those items whose inclusion or exclusion results in significant changes in the decision making for the users of business information.
The materiality concept of accounting is an accounting practice. It directs aninformed decision-maker to consider an item’s relevance or significance.
The concept of materiality in accounting governs how one recognises a transaction. This concept states that we shouldn’t record transactions with minimal significance. While you can document a transaction, you must alsoconsider its relevance and importance.
The purpose of the materiality concept is to ensure that financial statements are accurate and provide meaningful information to users.
Therefore, the information present in the financial statements must be complete in terms of all material aspects, so that it is able to present an accurate picture of the business.
The users of financial statements can be shareholders, auditors and investors, etc.
Assignment Submission Last Date
The IGNOU open learning format requires students to submit study Assignments. Here is the final end date of the submission of this particular assignment according to the university calendar.
30th April (if Enrolled in the June Exams)
31st October (if Enrolled in the December Exams)
