Important Concepts for quick revision of CPT

  1. Fundamental Accounting Assumptions: The following are assumed while preparation and presentation of financial statements (unless stated otherwise)
    • Going Concern : Enterprise will continue for foreseeable future.
    • Consistency : Accounting policies are applied consistently from one period to another.
    • Accrual : Income/Expenses are recognised as they are earned/incurred and not when cash is received or paid.
    • Mnemonic : CAG
  2. Accounting Policies Accounting Policies refer to specific accounting principles and methods of applying these principles adopted by the enterprise in the preparation and presentation of financial statements. E.g valuation of inventories. The following are considerations while selecting accounting policies-
    – Materiality
    – Prudence
    – Substance over form
    Mnemonic – MPS [Mb Per Second]
  3. Depreciation : A change in method of depreciation is considered as change in accounting estimate (and not a change in accounting policy) and is given a prospective effect. The requirement of retrospective application is no longer applicable.
  4. Shortcut to Compute depreciation under WDV method
    • Depreciation = Cost x Rate x (1-Rate)^(n-1)
    • For e.g. Cost = 1,00,000 Rate = 20%
      • Depreciation year 1 = 100,000 x .2 x .8^0 = 20,000
      • Depreciation year 2 = 100,000 x .2 x .8^1 = 16,000
      • Depreciation year 5 = 100,000 x .2 x .8^4 = 8,192 (^ represents power to)
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