Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.

Answer: The consistent practice for the preparation of the financial statements must be made in order to ensure consistency in the preparation of the accounts in determining the financial position of the business. The consistency of the accounting practices facilitates the decision making and comparison. For example – an organization adopting the practice of the Straight Line Method of depreciation must stick to it and must not adopt the Written Down Value of depreciation in order to compare the financial results of both the years.

 


 

Question: The realisation concept determines when goods sent on credit to customers are to be included in the sales figure for the purpose of computing the profit or loss for the accounting period. Which of the following tends to be used in the practice to determine when to include a transaction in the sales figure for the period, when the goods have been:

a. Dispatched

b. Invoiced

c. Delivered

d. Paid for

Give your reasons.

 

Answer: The correct answer among the above following options is option B, i.e. invoiced.

The realisation concept states that the revenue should be recognised once when it is relaisable or it is realised or whichever is earlier. Thus the invoicing of goods can serve as the basis for the organization to determine and recognize the transaction as the invoicing of the transactions infers that the ownership of the goods has duly been transferred. Hence the concerned business will not require to hold the payment once when invoicing is done.

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