What is Substance over form

What is Substance over form

Substance over form concept of accounting tells that transaction must reflect the economic reality and not the merely cover the legal form. For example the finance lease the risk and rewards has been transferred to the lessee and therefore the asset under finance lease treated as asset of the lessee despite the fact that title is still to be transferred.

What is materiality

What is materiality?

Materiality is a concept related to preparation of financial statements. An item is said to be material if user decision making may be effected by its omission or misrepresentation.

Normally there are two things which determine the materiality size and nature. Some time size alone make an item material and in other case nature alone make an item sensitive for materiality consideration and famous example of nature is entertainment expense.

Materiality is a very subjective thing and cannot be decided in isolation. An amount of 5,000 is material or not cannot be decided unless you are given a profit of the organization. It can be material if the organization has profit of 10,000 because the item is 50% of profit but it would be immaterial if organization has an profit of 500,000 because in this case it is only 1% of profit.

What is Prudence

What is Prudence

Prudence is a concept says that a care must be exercise while making a judgment or financial estimate by the accountant during the preparation of financial statement. The accountant is required to make many estimates and judgment during the preparation of financial statement.

Prudence concept says that asset and expenses are not to be overstated and income and liability are not to be understated. For example organization would not continue to include the bad debt in the receivable account because it will overstate the receivable account.

What is Going Concern

What is Going Concern

Going concern is basically one of the fundamental concepts for the preparation of the financial statements. Going concern assumption believe that there is no immediate threat to the organization existence and entity will continue to exist for a long period of time.

Going concern assumption also believe that entity will not curtail it operation materially in near future. The term long period is normally assumed to be next twelve month from the date of financial statement.

Going concern is important assumption because the financial statement prepared different when going concern assumption is not valid.