Accounting Principles and Practice

When changing depreciation policy, accounting standards (AS-10) require that the difference arising from the change be adjusted in the year of change itself. This catches the cumulative effect of using different rates/methods immediately, rather than deferring it or restating prior years. The adjustment is made to the asset account and reflected in the current year's P&L, ensuring the impact is transparent and timely.

Under WDV method: (i) The RATE of depreciation remains constant (e.g., 15% each year) - it does NOT reduce. (ii) The AMOUNT of depreciation reduces annually because it's calculated on the diminishing written-down value (a smaller base each year). (iii) Since rate is constant and amount decreases, this statement is false. (iv) In practice, assets rarely reach exactly zero; a small residual value typically remains. Therefore, only statement (ii) is correct.

Outstanding rent represents rent owed but not yet paid - this creates a liability (money owed to landlord). When rent expense is recognized, it reduces the owner's equity/profits. Therefore, outstanding rent increases liabilities while decreasing owner's equity (called 'owner's liability' in some contexts). Option A incorrectly says asset increases. Options C and D have the direction wrong.

When an old building is purchased, repairs and white washing done 'for the first time' are effectively renovation costs to make the building usable. These expenditures bring the asset to proper working condition and provide benefits over multiple years through the building's useful life. Since they create future benefits beyond the current period, they qualify as capital expenditures, not revenue expenditures.

Expenses represent outflows of economic benefits during a period. This happens either through cash outflow (decrease of assets like cash) or by incurring liabilities (increase of creditors). For example, paying rent decreases cash (asset outflow), or purchasing on credit increases accounts payable (liability incurrence). Option A describes revenue, not expenses.

Closing stock is the amount of inventory that a business still has on hand at the end of a reporting period.

The prudence principle requires cautious valuation (lower of cost and NRV). The consistency principle requires using the same method across periods. When you value stock at cost in one year and at lower of cost and NRV in another, you're applying prudence but violating consistency. The two principles conflict in this situation - you must choose which to prioritize.

Current assets are defined not just by convertibility to cash but by the intent to convert them within the operating cycle. Option D is most precise because it captures both the purpose (held for conversion) and the timeframe (operating cycle normally not exceeding 12 months). Options A, B, and C focus only on the time aspect without the purpose element.

The going concern concept assumes the business will continue operating indefinitely rather than being liquidated. This is the FUNDAMENTAL basis for: (1) Stating fixed assets at book value (historical cost less depreciation) rather than break-up value, (2) Allocating costs over time through depreciation, (3) Following accrual accounting, and (4) Carrying assets at historical cost. Options A, B, and C all describe alternative valuation bases (realisable value, market value) or outputs (income statement) that are NOT the underlying basis of going concern. Since none of A, B, or C represent the going concern concept, D is correct.

When a change in accounting policy has NO material effect in the current period but is REASONABLY EXPECTED to have material effect in later periods, AS-10 (Accounting for Changes in Accounting Policies) requires that the FACT of the change should be disclosed. You don't need to quantify the impact (since it's immaterial now), but you must inform users that the policy has changed so they can anticipate future material effects. This ensures transparency and allows users to make informed decisions. Option A (amount of change) suggests quantification, which is not required when current effect is immaterial. Option C (not disclosed) is clearly wrong.

Accounting equation is based on the dual aspect concept (debit and credit). Every transaction has a two sided effect.

This is the correct answer. This principle says that a business should not anticipate any profit but provide for all possible losses.

The going concern concept assumes the business will continue operating indefinitely rather than being liquidated. This assumption justifies spreading the cost of fixed assets over their useful life through depreciation, rather than valuing them at liquidation value. It forms the basis for periodic reporting and long-term asset accounting.

The going concern concept applies when a business is expected to continue operating indefinitely, making it appropriate to acquire fixed assets for long-term use in revenue generation (Option C). Options A, B, and D describe situations where the going concern assumption is NOT applicable - short-term ventures, liquidation scenarios, and financially distressed enterprises respectively.

According to conservatism, the business should not anticipate any profit but provide for all possible losses. Thus, stocks should be valued as stated above. Consistency concept advocates for following the accounting policies consistently. Realisation concept advocates for recording the change in value of asset only when it is realised. Cost concept states that the asset should be recorded in the books at cost price minus depreciation if any.