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

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

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Going concern concept is a fundamental accounting concept. It is because of this concept, distinction is made between capital and revenue expenditures and thus assets and liabilities are recognised.

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

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The concept of revenue recognition requires that the revenue for a business transaction should be realized when a legal right to receive it arises.

Q.3 Exceptions to this general rule of revenue recognition:

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In case of contracts like construction work, which take long time, say 2-3 years to complete, proportionate amount of revenue, based on the part of contract completed by the end of the period is treated as realized. Similarly, when goods are sold on hire purchase, the amount collected in installments is treated as realised.

Q.4 What is the basic accounting equation?

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The duality principle is commonly expressed in terms of fundamental accounting equation, which is:

Assets = Liabilities + Capital

Q.5 The realization 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:

1. Dispatched
2. Invoiced
3. Delivered
4. Paid for

Give reasons for your answers.

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The realization 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, when the goods have been invoiced.

Under the accrual basis, revenues and costs are recognised in the period in which they occur rather when they are paid. Under this, the monitory effect of a transaction is taken into account in the period in which they are earned rather than in the period in which cash is actually received or paid by the enterprise.

Q.6 Complete the following work sheet:

1. 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.
2. The fact that a business is separate and distinguishable from its owner is best exemplified by the _______________ concept.
3. Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the _____________ concept.
4. 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.
5. 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 ___________________.
6. If a firm receives an order for goods. It would not be included in the sales figure owing to the _______________ concept.
7. The management of a firm is remarkable incompetent, but the firms accountants cannot take this into account while preparing book of accounts because of ________________ concept.

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1. 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 or Prudence concept.
2. The fact that a business is separate and distinguishable from its owner is best exemplified by the Business Entity concept.
3. Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the Dual Aspect concept.
4. 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.
5. 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 or Prudence concept.
6. If a firm receives an order for goods. It would not be included in the sales figure owing to the Revenue Recognition concept.
7. The management of a firm is remarkable incompetent, but the firms accountants cannot take this into account while preparing book of accounts because of Money Measurement concept.

Q.7 The accounting concepts and accounting standards are generally referred to as the essence of financial accounting. Comment

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In order to maintain uniformity and consistency in accounting records, certain rules or principles have been developed which are generally accepted by the accounting profession. These rules are called by different names such as principles, concepts, conventions, postulates, assumptions and modifying.

The basic accounting concepts are referred to as the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting and are broad working rules for all accounting activities and developed by the accounting profession.

The generally accepted accounting principles have evolved over a long period of time on the basis of past experiences, usages or customs, statements by individuals and professional bodies and regulations by government agencies and have general acceptability among most accounting professionals.

These are constantly influenced by changes in the legal, social and economic environment as well as the needs of the users. These principles are also referred as concepts and conventions.

Q.8 Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.

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Consistency concept states that accounting policies and practices followed by enterprises should be uniform and consistent over the period of time so that results are comparable. Accounting principles are consistently being applied by different enterprises for the period under comparison or the same firm for a number of periods.

The accounting information provided by the financial statements would be useful in drawings conclusions regarding the working of an enterprise only when it allows comparisons over a period of time as well as with the working of other enterprises. Thus both inter-firm and inter-period comparisons are required to be made. This can be possible only when accounting policies and practices followed by enterprises are uniform and are consistent over the period of time.

Consistency eliminates personal bias and helps achieving results that are comparable.

Q.9 Discuss the concept based on the premise ‘do not anticipate profits but provide for all losses’.

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The concept of conservatism provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe. The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated. If the profits ascertained are more than the actual. It may lead to distribution of dividend out of capital, which is not fair as it will lead to reduction in the capital of the enterprise.

The concept of conservatism requires that profits should not be recorded until realized but all losses, even those which may have a remote possibility are to be provided for in the books of account.

This concept requires that business transactions should be recorded in such a manner that profits are not overstated. All anticipated losses should be accounted for but all unrealized gains should be ignored.

Q.10 What is matching concept? Why should a business concern follow this concept? Discuss.

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Matching concept emphasizes that expenses incurred in an accounting period should be matched with revenues during that period and follows from this that the revenue and expenses incurred to earn these revenue must belong to the same accounting period.

The process of ascertaining the amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from the revenue earned during that period.

It states that expenses incurred in an accounting period should be matched with revenues during that period.

While ascertaining the profit or loss of an accounting year, we should not take the cost of all the goods produced or purchased during that period but consider only the cost of goods that have been sold during that year.

For this purpose, the cost of unsold goods should be deducted from the cost of the goods produced or purchased.

Q.11 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?

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The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts.

It records, transactions that are to be kept not in the physical units but in the monetary unit.

The money measurement assumption is not free from limitations. Due to the changes in prices, the value of money does not remain the same over a period of time. The value of rupee today on account of rise in prices is much less than what it was, say ten years back. Therefore in the balance sheet, when we add different assets bought at different points of time, say building purchased in 2007 for ₹2 crore and plant purchased in 2017 for ₹1 crore, we are in fact adding heterogeneous values, which cannot be clubbed together.

As the change in the value of money is not reflected in the book of accounts, the accounting data does not reflect the true and fair view of the affairs of an enterprise.