NCERT Solutions for Class 11 Accountancy Chapter 2 - Theory Base of Accounting

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    Short Answer Type Questions

    1. Why is it necessary for accountants to assume that business entity will remain a going concern ?

    Ans. The going concern concept states that the business would survive for an indefinite period. Once a person starts a business they need to classify the expenditure in capital and revenue nature . The impact of capital expenditure will be shown in number of years as well as the benefit deriving from revenue expenditure belongs to current year only. Hence Accountants always assume that business should continue for a longer period of time.

    2. When should revenue be recognised? Are there exceptions to the general rule?

    Ans. Revenue is recognised when right to receive payment is established on the sale of goods. This means the ultimate ownership is being delivered to the buyer. There are some exceptions to the rules like : Hire purchase agreement and revenue recognition in case of construction works.

    3. What is the basic accounting equation?

    Ans. The basic accounting equation reflects the relationship between liabilities and asset side:

    A = L + C

    Where, A = Asset

    L = Liabilities

    C = Capital

    4. 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 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 reasons for your answer.

    Ans. The answer to the above question is the concept of realisation took place when the goods have been invoiced because, in realisation concept, the figure will be included in current year statement only when the ownership right is exercised . Hence in case of credit sale the legal right is exercised only when the invoice is created.

    5. Complete the following worksheet:

    (i) If a firm believes that some of its debtors may ‘default’, it should act on this by making sure that all possible losses are recorded in the books.This is an example of the conservatism concept.

    (ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the business entity concept.

    (iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the dual concept.

    (iv) The consistency concept states that if straight line method of depreciation is used in one year, then it should also be used in the next year.

    (v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be increased. Normal accounting procedure is to ignore this because of the conservatism concept.

    (vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the revenue recognition concept.

    (vii) The management of a firm is remarkably incompetent, but the firms accountants can not take this into account while preparing book of accounts because of money measurement concept.

    Long Answer Type Question

    6. The accounting concepts and accounting standards are generally referred to as the essence of financial accounting’. Comment.

    Ans. The accounting concepts and accounting standards lays down certain rules of regulations in accordance to which financial accounts are to be prepared. To maintain the accuracy and transparency of financial accounting such rules and regulations are required to be followed. There are basic accounting concepts like separate business entity, going concern concept, conservatism concept which provides the base for accounting. These concepts and accounting standards describe the methods of adjusting different items while preparing the financial statements. Accounting standards help an organization in maintaining uniformity in accounts. This uniformity is used by various users of accounts for making comparison
    between accounting statements of different entities. Users can take accurate decisions while using a correct financial information ,hence these concepts and accounting standards are essence of accounting.

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

    Ans. Financial statements are drawn to provide information about growth or decline of business activities over a period of time or comparison of the results, i.e. intra-firm (comparison within the same organisation) or inter-firm comparisons (comparison between different firms). Comparisons can be performed only when
    the accounting policies are uniform and consistent.

    According to the consistency principle, accounting practices once selected should be continued over a period of time (i.e. year after year) and should not be changed immediately. This help in a better understanding of the financial statements and thus make comparisons easy. For example, if a firm is following FIFO method for recording stock, and switches over to the LIFO, then the results of this year cannot be compared to that of the previous years. Although consistency does not prevent change in the accounting policies, but if change in the policies is essential for better presentation and better
    understanding of the financial results, then the firm must undertake change in its accounting policies and must fully disclose all the relevant information, reasons and effects of those changes in the financial statements.

    8. Discuss the concept-based on the premise ‘do not anticipate profits but provide for all losses’.

    Ans. According to the concept of conservatism the profits are recorded only when they are recognised but for seeable losses are recorded infinancial statements provisions for such losses should be created in order to safeguard the business in dealing with uncertainity and unforseen conditions.

    For example number of provisions are in advance created like provision of depreciation, provision of doubtful debts, provision for taxation etc. Like in case of machinery if an organisation wants to sold the old machinery they will be in need of large amount for purchasing the latest machinery, the amount collected out of provision for depreciation can be used.

    9. What is matching concept? Why should a business concern follow this concept? Discuss.

    Ans. The matching concept is an accounting practice whereby firms recognise revenues and their related expenses in the same accounting period. Firms report "revenues," that is, along with the "expenses" that brought them. The purpose of the matching concept is to avoid misstating earnings for a period.

    The business entities follow this concept mainly to ascertain the true profit or loss during an accounting period.This leads to either overstating or understating of the profit or loss, which may not reveal the true efficiency of the business and its activities in the concerned accounting period.

    10. What is the money measurement concept? Which one factor can make it difficult to compare the monetary values of one year with the monetary values of another year ?

    Ans. Money Measurement Concept mainly refers to those events that can be expressed in monetary terms and are recorded in the books of accounts. Thus, the money measurement concept enables consistency in maintaining accounting records.

    For example, 20 laptops sets of ₹50,000 each are purchased and this event is recorded in the accounts book with a total amount of ₹10,00,000.

    The factor which can make it difficult to compare the monetary values of one year with the monetary values of another year is inflation.

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