NCERT Solutions for Class 11 Accountancy Chapter 2 Theory base of Accounting

NCERT
SOLUTIONS
CLASS - 11th

aglase .co

Book Name : Financial Accounting-I Ncert Solutions | Chapter-2 Accountancy

Class : 11th
Subject : Accountancy
Chapter : 2
Chapter Name : Theory base of Accounting

Q1 Why is it necessary for accountants to assume that business entity will remain a going
concern?

Answer. Going Concern Concept assumes that the business entity will continue its operation for
an indefinite period of time. It is necessary to assume so, as it helps to bifurcate revenue
expenditure (i.e. expenditure related to current year), and capital expenditure (i.e. expenditure
whose benefits accrue over a period of time). For example, a machinery that costs Rs 1,00,000,
having an expected life of 10 years, will be treated as a capital expenditure, as its benefit can be
availed for more than one year; whereas, the per year depreciation of the machinery, say Rs
10,000, will be regarded as a revenue expenditure.

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Q2 When should revenue be recognized? Are there exceptions to the general rule?

Answer. Revenue should be recognized when sales take place either in cash or credit and/or
right to receive income from any source is established. Revenue is not recognized, in case, if
the income or payment is received in advance or the payment is actually received from the
debtors. In a nutshell, revenue will be recognized when the right to receive income is
established. For example, Mr. A sold goods in January and received payment in February; then
revenue is considered to be recognized in the month of January and not in February. However,
if Mr. A received cash in advance, i.e. in December and goods are sold in January, then the
revenue is recognized in January and not in December.

The exceptions to this rule are given below.

Hire purchase− When goods are sold on hire-purchase system , the amount received in
instalments is treated as revenue.

Long term construction contract− The long term projects like construction of dams, highways,
etc. have long gestation period. Income is recognized on proportionate basis of work certified
and not on the completion of contract.

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Book Name : Financial Accounting-I Ncert Solutions | Chapter-2 Accountancy

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Q3 What is the basic accounting equation?

Answer. The basic accounting equation is,

Assets = Liabilities + Capital

It means that all the monetary value of all assets of a firm are equal to the total claims, ​viz.​
owners and outsiders.

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Q4 The 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.

Answer. According to the realisation concept, revenue is recognized 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 recognized.

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Q5 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.

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Book Name : Financial Accounting-I Ncert Solutions | Chapter-2 Accountancy

(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.

Answer.

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

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Q1 ‘The accounting concepts and accounting standards are generally referred to as the
essence of financial accounting’. Comment

Answer. Financial accounting is concerned with the preparation of the financial statements and
provides financial information to various accounting users. It is performed according to the basic
accounting concepts like Business Entity, Money Measurement, Consistency, Conservatism,

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Book Name : Financial Accounting-I Ncert Solutions | Chapter-2 Accountancy

etc. These concepts allow various alternatives to treat the same transaction. For example, there
are a number of methods available for calculating stock and depreciation, which can be followed
by various firms. This leads to wrong interpretation of financial results by external users due to
the problem of inconsistency and incomparability of financial results among different business
entities. In order to mitigate inconsistency and incomparability and to bring uniformity in
preparation of the financial statements, accounting standards are being issued in India by the
Institute of Chartered Accountant of India. Accounting standards help in removing ambiguities
and inconsistencies. Hence, accounting standards and accounting concepts are referred to as
the essence of financial accounting.

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Q2 Why is it important to adopt a consistent basis for the preparation of financial statements?
Explain.

Answer. 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. years after years) and should not be changed very frequently. These
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
weighted average method, 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.

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Q3 Discuss the concept-based on the premise ‘do not anticipate profits but provide for all
losses’.

Answer. According to the Conservatism Principle, profits should not be anticipated; however, all
losses should be accounted (irrespective whether they occurred or not). It states that profits
should not be recorded until they get recognized; however, all possible losses even though they

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Book Name : Financial Accounting-I Ncert Solutions | Chapter-2 Accountancy

may happen rarely, should be provided. For example, stock is valued at cost or market price,
whichever is lower. If the market price is lower than the cost price, loss should be accounted;
whereas, if the former is more than the latter, then this profit should not be recorded until unless
the stock is sold. There are numerous provisions that are maintained based on the
conservatism principle like, provision for discount to debtors, provision for doubtful bad debts,
etc. This principle is based on the common sense and depicts pessimism. This also helps the
business to deal with uncertainty and unforeseen conditions.

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Q4 What is matching concept? Why should a business concern follow this concept? Discuss.

Answer. Matching Concept states that all expenses incurred during the year, whether paid or
not, and all revenues earned during the year, whether received or not, should be taken into
account while determining the profit of that year. In other words, expenses incurred in a period
should be set off against its revenues earned in the same accounting period for ascertaining
profit or loss. For example, insurance premium paid for a year is Rs1200 on July 01 and if
accounts are closed on March 31, every year, then the insurance premium of the current year
will be ascertained for nine months (i.e. from July to March) and will be calculated as,

Rs 1200 − Rs 900 = Rs 300

Thus, according to the matching concept, the expense of Rs 900 will be taken into account and
not Rs 1200 for determining profit, as the benefit of only Rs 900 is availed in the current
accounting period.

The business entities follow this concept mainly to ascertain the true profit or loss during an
accounting period. It is possible that in the same accounting period, the business may either pay
or receive payments that may or may not belong to the same accounting period. This leads to
either overcasting or undercasting of the profit or loss, which may not reveal the true efficiency
of the business and its activities in the concerned accounting period. Similarly, there may be
various expenditures like, purchase of machinery, buildings, etc. These expenditures are capital
in nature and their benefits can be availed over a period of time. In such cases, only the
depreciation of such assets is treated as an expense and should be taken into account for
calculating the profit or loss of the concerned year. Thus, it is very necessary for any business
entity to follow the matching concept.

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Book Name : Financial Accounting-I Ncert Solutions | Chapter-2 Accountancy

Q5 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?

Answer. Money Measurement Concept states that only those events that can be expressed in
monetary terms are recorded in the books of accounts. For example, 12 television sets of
Rs10,000 each are purchased and this event is recorded in the books with a total amount of Rs
1,20,000. Money acts a common denomination for all the transactions and helps in expressing
different measurement units into a common unit, for example rupees. Thus, money
measurement concept enables consistency in maintaining accounting records. But on the other
hand, the adherence to the money measurement concept makes it difficult to compare the
monetary values of one period with that of another. It is because of the fact that the money
measurement concept ignores the changes in the purchasing power of the money, i.e. only the
nominal value of money is concerned with and not the real value. What RS 1 could buy 10 years
back cannot buy today; hence, the nominal value of money makes comparison difficult. In fact,
the real value of money would be a more appropriate measure as it considers the price level
(inflation), which depicts the changes in profits, expenses, incomes, assets and liabilities of the
business.

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