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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Sundaram Textiles Ltd. buys a machine for Rs 12,00,000 and charges depreciation over its useful life, treating the cost as an asset on the balance sheet rather than as an expense in the year of purchase. Which basic accounting assumption/qualitative reasoning primarily supports spreading the cost over several years, given that the business is expected to continue operating?

Going concern is the assumption that supports spreading the machine's cost over its useful life. Since the enterprise is expected to continue operating, the asset is carried at depreciated cost and not written off or shown at liquidation value in the year of purchase.

  1. AGoing concernCorrect
  2. BMateriality
  3. CPrudence
  4. DSubstance over form

Explanation

Because the entity is expected to continue in operation for the foreseeable future, assets are carried at cost less depreciation and cost is allocated over the periods that benefit. Under a break-up (non-going-concern) view the machine would be shown at realisable value. Prudence concerns uncertain losses and is not the basis here.

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