Which of the following is one of the major considerations governing the selection and application of accounting policy:a)Prudenceb)Materialityc)Substance over formd)All of the aboveCorrect answer is option 'D'. Can you explain this answer?

Question

Answer

The major considerations governing the selection and application of accounting policies, as specifically outlined in AS-1 are as under:

a. Prudence

In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.

b. Substance over Form

The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.

c. Materiality

Financial statements should disclose all “material” items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements.

Answer

Major Considerations Governing the Selection and Application of Accounting Policy:

Prudence:
Prudence refers to the concept of exercising caution in the application of accounting policies to avoid overstating assets or profits. It is important to be conservative in accounting practices to ensure that financial statements reflect a true and fair view of the company's financial position.

Materiality:
Materiality is a key consideration in accounting policy selection, as it pertains to the significance of an item or error in financial statements. Materiality helps determine whether an item should be disclosed or recognized in the financial statements, ensuring that only significant information is included.

Substance over Form:
The principle of substance over form emphasizes the importance of the economic substance of transactions over their legal form. This principle ensures that financial statements reflect the true nature of transactions, even if their legal structure suggests otherwise. It is essential for presenting a fair and accurate representation of the company's financial position.

All of the Above:
All of the above considerations - prudence, materiality, and substance over form - play a significant role in governing the selection and application of accounting policies. By adhering to these principles, companies can ensure transparency, accuracy, and reliability in their financial reporting, ultimately providing stakeholders with valuable information for decision-making.

Similar CA Foundation Doubts

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Which is an example of an accounting policy. (

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