NCERT Solutions Class 11, Accountancy, Chapter- 2, Theory Base of Accounting
Short Answers
1. Why is it necessary for accountants to assume that a business entity will remain a going concern?
Solution:
It is necessary for accountants to consider that a business entity will remain a going concern, as an asset will be calculated for the profit it earns, along with the depreciation it is charged, both of which are not restricted only for one accounting period. Hence, it indicates continuity in business.
2. When should revenue be recognised? Are there exceptions to the general rule?
Solution:
Revenue is recognised if the right to receive income is established. It can also be said to have been established when a sale takes place in cash or in credit.
The following exceptions can be seen:
1. Goods that are sold on hire purchase, the amount thus collected in instalments will be accounted as revenue realised.
2. Projects related to the construction of buildings, etc., are projects of long duration; revenue is realised periodically that is in proportion to the part of work which is completed.
3. What is the basic accounting equation?
Solution:
The assets of a business are equal to the claims of its owners and creditors, as per the basic accounting equation. Liabilities are known as Creditor’s Equity, and Capital is known as Owner’s Equity. It is represented as
Assets = Capital + Liabilities
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 trends is 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.
Solution:
According to the realisation concept, revenue is recognised when an obligation to receive the amount arises.
When the goods are invoiced, it is treated as the transfer of ownership of goods from the seller to the buyer and hence the revenue is recognised.
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 ___________ concept.
(ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the ___________ concept.
(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the ___________ concept.
(iv) The ___________ 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 ___________.
(vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the ___________.
(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 ___________ concept.
Solution:
(i) conservatism
(ii) business entity
(iii) dual aspect
(iv) consistency
(v) conservatism
(vi) revenue recognition
(vii) measurement
Long Answers
1. ‘The accounting concepts and accounting standards are generally referred to as the essence of financial accounting.’ Comment.
Solution:
The following points will be helpful in understanding the above-mentioned statement:
1. Following the accounting concepts and standards make accounting information easy to rely on and compare.
2. Many accounting concepts, such as going concern, conservatism, dual aspect, accounting period, etc., are considered while preparing accounts.
3. It ensures relevant financial data will be recorded.
4. Adhering to the concepts and standards ensures uniformity in accounting procedures.
5. Maintain consistency which leads to fewer errors.
6. Improves understandability and leads to better decision-making.
2. Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.
Solution:
Consistency should be maintained in preparing financial statements as
1. Financial statements are used to compare the performance of an organisation with competitors and also self, so it is easier to assess if statements are prepared to maintain consistency.
2. A consistent method of statement preparation will help compare two different periods.
3. Eliminates any personal bias that makes the report more comparable.
4. Results will become inconsistent if different principles are followed.
3. Discuss the concept based on the premise ‘do not anticipate profits but provide for all losses.’
Solution:
The concept is based on the Conservatism principle. It has the following considerations:
1. Incomes should be calculated properly so that profits are not overestimated.
2. As profit is not calculated in excess, it prevents dividend distribution from the capital.
3. Provision for doubtful debts should be made.
4. Stocks are to be valued at either cost price or market price, whichever is lower.
5. Intangible assets should be accounted.
6. Protects against uncertainty in business.
4. What is the matching concept? Why should a business concern follow this concept? Discuss.
Solution:
The matching concept states that expenses that are incurred in an accounting period should match the revenue earned during that period. Thus, all expenses for that accounting period, whether or not paid during that year and all revenue, whether earned or not during the period, should be considered to calculate profit or loss.
Business concerns should follow this concept as
1. Matching concept portrays the exact financial status of the business.
2. As revenue and expenses are matched, the profit or loss is not over or under-stated.
3. Expenditure of capital assets which span over a period cannot be determined in one accounting period. Hence, depreciation as an expense can be more suitable towards calculating business profits.
4. It ensures transactions occurring in one accounting period, although realised in another accounting period, will be recognised for the accounting period in which it occurred.
5. 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?
Solution:
According to the money measurement concept, those transactions and events in an organisation which can be expressed in monetary terms should only be considered for recording in the accounting books.
Also, it states that the monetary value of the unit should be considered and not the physical unit.
One factor that impacts measurement is that the value of money is not constant every year; the value of money will be different during different time periods due to price fluctuation. So, an asset purchased 10 years back at a price of 5000 may cost 5 times higher in today’s date, thus making the comparison difficult as the monetary worth of two time periods will vary considerably
