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0:00
What's up everyone, welcome back to the channel. This is day 40 of our 100 days commerce masterclass for class 11. And in today's class, we will finish our chapter number 3, Principles.
0:13
And I have made a proper playlist. Some kids were saying in the comment section of the last video, Sir, make a playlist. The playlist is already made. Go and see. Accounts BST is being made a proper playlist of 100 days. So let's start quickly. And let's finish the Accounting Principles. Let's begin.
0:43
Yesterday we saw the meaning of Accounting Principles very well. Then we read its features. After features, we read why it is generally called accepted. Then we read why it is called like this. Then we saw the kinds. Some are concepts, assumptions. And today we will read some accounting conventions.
1:01
Now we have read accounting concepts and assumptions. Going concern, consistency, accrual. We read all this well yesterday. Today we are going to read some new concepts.
1:14
See, what are the other concepts? There are three main assumptions. Which we always assume that this is happening. Which are business going concern. Second, we are following accrual basis of accounting. Not following cash basis.
1:33
Third, we are following our policies consistently. We are not changing policies again and again. These three things we basically assume and keep going.
1:42
There are some other new things about accounting. Which you are going to learn here. Take a screenshot of this. We will read all these concepts.
1:49
Like first comes business entity concept. Sir, what does business entity concept say? Children, business entity concept says that whenever you do accounting. Then there is a different identity of business. There is a different identity. And there is a different identity of owner. There is a different identity. My name is Rajat Arora. But the name of my organization is DC line. So DC is known by its name. I am known by my name. If I invest some capital in DC.
2:22
Then that capital is a liability for DC. That money came to us. And we have to return this money to my owner. Whenever he wants to withdraw.
2:32
That's why capital is kept in liability. Otherwise, children get confused that sir capital should be as it is money. Children, the organization has taken that money from the owner. Now the organization has to pay the money of the owner. That's why capital is considered in liability.
2:48
So if someone asks you why capital is considered as a liability.
2:51
Because of this concept. That is business entity concept. So according to business entity, business is a separate identity. It will have its own name. It will have its own identity. It will do everything according to its own. So see what is written. According to this concept, business is treated as a separate unit. And distinct from its owners, creditors, managers and others. In other words, the owner is always considered as separate from the business he owns. Business will have its own books.
3:18
Business will have its own transactions. Business will do everything from its own point of view.
3:22
What is considered as a proprietor? Or what is considered as an owner?
3:27
Creditor. Whatever money he has invested. That's why we always consider capital as a liability.
3:38
Understood. So what is the name of this concept? Business entity concept.
3:44
What is the next concept coming? Money measurement concept. Now what does this money measurement concept say? Money measurement concept says that there are many things in our business. But it is not practically possible to record everything. So first of all, whatever is happening in business, we will measure it in terms of money. Now you are buying some things in kg. You are buying some in liters. You are buying some in pieces. There are some things that you cannot record.
4:17
Because they cannot be measured in money. So somewhere money measurement says that if you keep so many units, there will be chaos. There will be confusion. So when you do accounting, then you will not measure all things in units.
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You will measure in amount.
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You will measure in money. So see what it says. Only those transactions are recorded which are capable of being expressed in terms of money. Any event, even if it is very important, will not be recorded if its effect can be measured in terms of money with a fair degree of accuracy. Even if it is a very important matter, if it cannot be measured in terms of money, then we cannot record it. Sir, like the quality of the management. Now if the management is good, then the business will grow.
5:04
If it is not good, then the business will not grow. But how good it is, how will you measure it in money? So you cannot measure the quality. How is the image of the organization being made? How is goodwill being made? If the labor goes on strike, then how much loss is happening? How capable are our human resources?
5:19
So see there are many such things which are important for us. But if we cannot measure in terms of money, then we do not record it. That is why we say that there are some limitations of money measurement. What are the limitations? Like it is saying that it cannot record many transactions which cannot be measured in terms of money. But it has a very bad impact on the business. Like how is the human resource, what is their quality? Now see due to change in price, the
5:47
value of money does not remain the same over a period of time. So if the price will increase, the value of rupee today is much less than it was say 10 years back. This means that when inflation happens, then along with inflation, when inflation will happen, then the value of money keeps on decreasing. Sir, how does the value of money decrease? You will think that 5 years ago, the thing which used to come in 100 rupees, does it come in 100 rupees today? Think, now 100 is the same.
6:14
The note of 100 was there earlier and the note of 100 is still there. But the thing which used to come in 100 rupees earlier, does not come today. This means that the value of 100 is decreasing with time. This is called inflation, kids. This is called inflation.
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Now ultimately, we have measured in terms of money.
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But the value of that money has decreased. So we are not able to put the exact value of that particular thing which is there today. These are also some limitations which are there in money measurement.
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Next concept comes, accounting period concept.
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What does accounting period concept say? It says that the business is going to run for a long period. You have studied going concern, right? What does going concern say? Business will run, will run, will keep on running. But the business is in profit or loss, it should be calculated from time to time. Now sir, how much time should we do? So we said that we will consider that accounting period as 1 year. We will consider 1 year. So every year, what we will do?
7:10
We will calculate profit or loss of the business. In which year, which will start on 1st April, will end on 31st March. So for our accounting, the accounting period which is considered, we call it financial year. Calendar year is from 1st January to 31st December. Financial year is from 1st April to 31st March. Is it fine, son? Now all the organizations follow financial year. That's why when does your school start? When does 1st April end? 31st March. Are you understanding?
7:41
So schools, colleges follow financial year. So it is written that the entire life of the firm is divided into time intervals for measurement of profits of the business. 12 month period is usually adopted for this purpose. Is it fine? Now let's move ahead, kids.
7:59
What is next? Cost concept or historical cost concept. Now what is cost concept, kids? Cost concept says that whenever you buy an asset, whenever you purchase an asset, you have to record it on its original cost in books. Neither that value should be overvalued nor that value should be undervalued. Sir, what does it mean? See, it is very simple. An asset is ordinarily recorded in the books at the price at which it was acquired. That is, you record that asset at that
8:33
particular value of how much you have bought.
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Then further its accounting will be from that value. Like for example, we bought furniture worth 1 lakh. So you record it at 1 lakh.
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Now how much depreciation will be there on it every year, we will keep doing that. That is, this cost becomes the basis of all the subsequent accounting. What is this cost? It becomes the basis. This is the basis for the next accounting.
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Since the acquisition cost relates to the past, it is referred to as historical cost. Because acquisition cost, I don't know when the asset was bought. And it is running at the same cost. So that's why it is called historical cost.
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Okay kid? First of all, why do we follow this? Because you can verify it with the bill, with the invoice. See, this thing has been bought for so much money. Right? It also justifies going concern. Because what does going concern say? That the asset business is going to run for a long time. So you can also consider the asset to run for a long time. You don't write expenses and finish it in a year. You consider it for a long time. Consider the asset.
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Right? What is written after that, son? Market values and current values are difficult to be determined. Now how much is that asset today? What is its market value? It is very difficult to determine. That's why it is better to write on historical cost.
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Okay? But sir, are there any drawbacks to it? Yes, there are some drawbacks to it. Like assets for which nothing is paid will not be recorded. For whom money was not given. But our assets will not be recorded. Because they have no historical cost. Like our goodwill. Brother, our goodwill is an asset for us. But we did not pay anything for it. Right? Then it will not be recorded either. Because it has no cost. During periods of inflation. If there is inflation, there is inflation.
10:19
Then the net profit or net loss that will come. It will be seriously distorted. Because depreciation will be charged against revenues at current prices. Because the depreciation will take place according to the current prices. And the asset has been recorded at historical cost. So the right profit or loss will not come children. Okay son. Perfect. This is the historical cost. The basic thing is that you have to record the asset at its original cost. Not at the current value. Right? Okay.
10:48
Perfect. What comes next? Dual aspect concept. Sir, what is this dual aspect concept? Son, dual aspect. Like the accounting equation has been made. Every transaction will impact twice. Right? Every transaction. Whatever asset you are buying. One asset is coming. Money is going from you. You are buying in debt. Asset is coming. Liability is also coming. So everything will impact at least twice. What is this concept called? Dual aspect concept. According to this concept.
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Every business transaction is recorded as having a dual aspect. In other words. Every transaction affects at least two accounts. Will impact at least twice.
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If one account is debited. If one will be debited. Then the second credit will definitely happen. One debit and the second credit. What is this system called?
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Double entry system. Okay. That's why we say that assets is equal to liabilities plus capital. We have already discussed all this in the accounting equation.
11:49
After this comes realization concept or revenue recognition concept. Sir, what is revenue recognition? What is the meaning of this concept? See kids.
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Revenue means your earning. When it should be recognized on which date.
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We have to learn this in this concept. Sir, recognizing means on which date we should believe that revenue is happening. Right? Like for example. I say that we got an order. On 1st July.
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That we need goods worth Rs. 50,000.
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Okay. We started its manufacturing on 2nd July.
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We started its manufacturing.
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On 2nd July. Okay. We prepared that goods.
12:37
In a week. And on 9th July. We said to the opposite party that yes. Your goods are ready. And we are dispatching. So we informed on 9th July.
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That brother yes. Your goods are ready. And we are ready to dispatch. So basically we can transfer ownership to you. On today's date. From today's date the goods are yours. Your goods are ready. Take it or we are sending it. We told them on 9th. And goods reached them on 15th July. On 15th July. Reached the destination.
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I got the money on 18th July. On 18th July. Money was received.
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Now in my books. When should I recognize this revenue?
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The day the order came. The day it started being made. The day I informed. Transferred ownership.
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The day goods reached the party. Or the day I received cash. So there is a lot of confusion. When should we accept our sale?
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So kids. Revenue recognition teaches this. It says. You recognize any revenue. On the date you transferred ownership. On the date you transferred. That brother is fine. We are selling goods from our side. And this goods is yours. So see what is written. Revenue means. That amount. Which is added to the capital. As a result of business operations. It is earned by sale of goods. Or by providing a service. Revenue recognition says. At what time you can consider revenue.
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Realized.
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So revenue is deemed to be realized. Remember this line. This is the most important. When the title or ownership of the goods. Have been transferred to the. Purchaser. The day you have ownership. Or title. Or right. We will call it in Hindi. Who did you transfer?
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Purchaser. Okay. Revenue recognition is not related. With receipt of cash. It has nothing to do with money received.
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It has nothing to do with reached. It has nothing to do with order. It has nothing to do with manufacturing.
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The day you told the party. Brother, the goods are ready. Take it. That day you considered the sale. Okay. So revenues in case of income. Like rent, interest, commission. Is recognized on time basis. Okay. Like rent for the month of March. Even is received in April. The sale will be treated as. Revenue of March only. Even if it is received in April. Or in June. Or in June. March's income. So it will be written in March.
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Okay. Son. Okay. Because of revenue recognition. The advance that is received. We do not consider it as sales. Okay. Perfect. Good.
15:21
Which concept is coming after this? Matching concept. Sir, what does this matching concept say? Look for matching. Let's go on it. On note.
15:29
Matching concept says. Son. That what is your income.
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The expenses incurred in earning this income.
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Compare it with that. What is your income.
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The expenses incurred in earning this income. Compare it with this. Then you have. Or I say this. Your revenues.
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The expenses incurred in earning this revenue. Compare it with that. Then your true profit or loss will come out. Otherwise it will come out wrong. Sir, what does this mean? Look. For example. I bought these 10 T-shirts. Okay. I bought 10 T-shirts. One for 500 rupees.
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10 T-shirts. One for 500 rupees. So I bought stuff for 5000 rupees.
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How much stuff did you buy? For 5000 rupees. Okay. And now I sold 6 T-shirts.
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I sold 6 T-shirts. According to 600 rupees one.
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Sold 6. According to 600 rupees one. So ultimately. According to 6 T-shirts 600. So I am saying. Revenue of 3600 rupees.
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Revenue of 3600 rupees. 6 T-shirts sold for 3600 rupees. Right. So I was asked. If there is a profit or loss. So I am saying. 5000 rupees was spent. Means 5000 is minus. Income of 3600 rupees. Revenue is plus. So it means. Loss of 1400 rupees.
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Loss of 1400 rupees. 5000 went from my pocket.
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3600 came in my pocket. 1400 did not come to me yet. So this is my loss. Now you think. Has this loss actually happened? Or this loss has not happened? So this is called matching concept. Matching says. How much is the revenue of T-shirts? Sir. Revenue of 6 T-shirts. So why are you matching the expense of 10 with this? Match the expense of 6 too. So this is wrong. What will I say? How much is 6 T-shirts?
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So 6 T-shirts are 6 into 500.
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This will come 3000. And how much did it sell for? Of 3600 rupees. So there is a profit of 600.
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This is what we call as matching concept. Matching says. There is an income of 600. Match it with the expense of 600. Why are you matching the revenue of 600 with the expense of 10? Only then will the right profit and loss come out. Did you understand or not? This is what we call as matching concept. See.
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This concept is very important for correct profit and loss. According to this concept in determining the profit. All costs which is applicable to the revenue. All the expenses which is applicable to earn the revenue. Charge it against that. On the basis of this principle. Outstanding expenses though not paid. Are shown in profit and loss account. It is saying that due to matching. Although we have not paid some expenses yet. Like outstanding expenses. But it has happened.
18:32
So now we write it in expenses too. Is it correct son? What does objectivity concept say son? Objectivity says. Whatever things you are recording in books of accounts.
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It should be in objective manner. Objective manner means. With complete honesty. Without any personal bias. Everything should be true and fair. This is objectivity. It is very simple. This concept requires that. Accounting transaction should be recorded. In an objective manner. Free from personal biasness. Of either management or the accountant. Okay. Now how will we know whether it is objective or not? So what do we consider for that? For that we say that. Every transaction should have proof.
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Like you have. If you have deposited money. Then there should be a pain slip. There should be agreements. There should be cash memos. Everything should have proof. Then only it will be considered. Okay son. After this now we are reading. What is the difference between concepts and conventions?
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Sir in concepts and conventions. Like you have read concepts till now. So what are the concepts? Which are legally accepted.
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Whose legal acceptance is there. What are conventions? We are going to read conventions now. What are conventions son? Conventions are those which are with usage.
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With general agreement. With customs. That is, there are some old customs. There are some traditions. We are coming from them. Okay. So what do we call them? They are conventions. So conventions have no legal acceptance. They are not made by law. How are they made? That generally people have accepted it. Made by traditions. So we call them conventions. Okay. The concepts are basic assumptions. On the basis of which all transactions will be recorded. The conventions.
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We just follow mainly by making profit and loss balance sheet.
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Okay. No accounting is done on the basis of that. Right. What is the significance of concepts? This is a uniform set of rules. Brother, the journal is based on these rules. From there ledger. From there trial balance. Everything is made from them. They do not have any special importance. In terms of rules. When we will make P&L. When we will make a balance sheet. So it is necessary in that. But if we see like that. So these are not so important. Role of personal judgment.
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Role of personal judgment.
20:48
There is no role in this. There is no role of personal judgment. But there is a role of personal judgment. These are from custom. From tradition. From usage. With time people have accepted. So these are run by personal judgment.
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Uniform adoption. They have uniform adoption. Everywhere as it is followed. There is no such uniformity in them. Somewhere there is some tradition. Somewhere there is some tradition. Okay son. It is called accounting conventions. Take a screenshot quickly.
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Now sir, what are the conventions? Come, I will teach you conventions. In conventions, we have 3 conventions mainly. Full disclosure. Materiality. Conservatism. Okay. Now these kids have their own beliefs.
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So that's why I said that these are not rules. But on traditions. On customs. With usage. With general acceptability. People have accepted. Okay. So first comes the convention of full disclosure. Sir, what does full disclosure say? What will this full disclosure say? So my dear idiots. It is in the name only. Full disclosure. Full disclosure says that in your accounting. Every transaction should be fully disclosed. That is, every transaction should be discussed in full detail.
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Record even the minor things. If any transaction is of 1,99,999 ,999.99. Then record that 0.99 too.
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So fully disclose everything. What is this called? Full disclosure. So you must have seen. Some people want everything to be very accurate. They want it completely accurate. Such people follow full disclosure.
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Now some people say. No man. What to follow so much. Minor things which are not so important. Turn them right off. Turn them round off. They are not so important. So why to spoil your mind because of such things. Those people follow materiality. That is, materiality is its exception. What is the exception of full disclosure?
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What is the exception of full disclosure? Materiality. Materiality means. Which thing is material for me. Material means important. Which thing is important for me. I will just record it. Which is not so important for me. It does not impact my business so much. I will not record it. So some people are fans of this. Those who say record everything. Some people say. No man. We will record important transactions. There is no need for waste. You are a fan of this. So it is called materiality.
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So both are different things. Now some people like this. So they follow this. Some people like this. So they follow this. Okay son. What is the third? Conservatism or prudence. What does conservatism or prudence say son. Its mindset is different with respect to expense and income.
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Expense is different.
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Income is different.
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So it has a different mindset with respect to expense and income. What does it mean? It has a simple meaning. Children. It says that if someone is going to be my expense. So start preparing for that expense from today. That you can see. That you have to go to college after 6 months. You have to pay the college fees. So from today you start saving money for it. From today you make provisions for it. Because you know that expense is going to come. So prepare for it from today.
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This has to be taken care of in the case of expense.
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Okay. So you have become conservative. You have become thoughtful. You are doing things very carefully. This is called being conservative. That you are taking care of your expenses.
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What does it say in the case of income? That there is going to be some income. Don't be happy. Brother, then it didn't happen later. There will be a problem. So it is going to happen. Don't be happy with it. When it will actually happen. Then you will be happy. So in the case of income. When it actually happens. Consider it then. In the case of expense. When you know that it is going to happen in the future. Start preparing from today. This is called conservatism. Or prudence. Okay.
24:45
So you have to prepare for expenses from today. If there is going to be income in the future. Then you will be happy when it happens. This is called conservatism. Here. Done. See what is it? Convention of Full Disclosure. This convention requires that. All the significant information. Relating to economic affairs of the enterprise. Should be completely disclosed. It is saying. Disclose everything completely. There should be a sufficient disclosure of information.
25:13
Which is of the material interest. To the users of the financial statements. That is, disclose everything properly. That is why we write contingent liabilities. In the notes below. Sir, what are contingent liabilities? Contingent liabilities are. Children, which are not liabilities today. Suppose there is a case in the court on our firm.
25:33
Now if we lose the case. Then we have to give him money. If we win the case. Then we don't have to give him any money. So whether to give money or not. It depends on my defeat or victory. Now the case is going on. Full Disclosure says. Write this in the notes below. In your books and accounts. Write this in the notes below. Because this is also one thing. Which we have to give. So Full Disclosure says. Write this. There materiality will say. Leave it. What is this?
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We will see when the liability comes. Right? So Full Disclosure says. Write everything and go. Right? If I talk about materiality there. So what does materiality say? Materiality says. It is the exception of Full Disclosure. This is a little opposite of Full Disclosure. There is an exception. It is an exception to the convention of Full Disclosure. Items having an insignificant effect. Or irrelevant to the users. Need not to be disclosed. He is saying. Those whose effect is not so significant.
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Or irrelevant. They do not need to be disclosed.
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These are either left out. Or merged with other items. Okay? Son. Perfect. Right? Let's go. Sir. Understand this too.
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Now sir. What does conservatism or prudence say? I told you this. All the losses should be recorded. If there is any anticipated loss. Any loss can happen. For that, you do recording from now and go. But you ignore unrealized or anticipated gains now. Okay? In other words. Conservatism is the policy of playing safe. This comes a lot in 1 mark. Children. That this is the policy of playing safe. Conservatism. Okay? We make provisions for all known liability. For losses. For this.
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Whether we are able to properly determine the amount. Or not. Okay? But for income. We do not do anything like this. For income. We say. Brother. We will see when it will happen. Okay? For this. Now see. Some things. Wherever you see it. In your books. Like closing stock. The stuff you have left. We value it. Cost. Or its value today. Whichever is lower. We say. Brother. Write closing stock on cost. Or write on realizable value. Write on NRV. NRV means. How much money is expected to get from it.
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So the concept says. Brother. Write whatever is less. Do not be too happy. If the cost is less. Then write on the cost. If NRV is less. Then write on it. We will see when we get more money.
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You write less in your books. Because. Do not be too happy for income. We value closing stock.
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Cost or realizable value. Whichever is less. That's why. We make provisions on doubtful debts. We think. My debtor will not give money. So for that. Let's make provisions in advance. That's why we take policies. Insurance. So all these things. Children. Which convention says. Prudence or conservatism. Okay. Son.
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Perfect. Okay. Now you will see. He is saying. If you are conservative. If you are conservative. Then in this case. Your profit and loss account. It will show a little lower profit. It is a little profit. It will show less. And that's why.
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Assets and liabilities. The value. It will come down a little.
28:45
Okay. Son. Why? Because you are conservative. You are recording things on less values.
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So your statements. They are going to be a little less.
28:53
That's it. Asshole. This was our. Complete. Complete accounting principles. I hope. You have understood. Complete accounting principles. Very well.
29:03
And you will study it well. You will complete the chapter. After this. In the next class. Let's do chapter number 4. Similarly. In this week. I will cover a lot of chapters. And things will be completed. Okay. That's it for today. Thank you so much for joining in. I am going to see you all. Very. Very. Very soon. Till then. See ya. Take care. Bye. Keep growing. Keep glowing. And keep smiling.
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