Chapter 2- Theory Base on Accounting - Class 11 PDF Download

 Page 1


 
CHAP-2 THEORY BASE OF ACCOUNTING 
 
Q1 Why is it necessary for accounts to assume that business entity will remain a going 
concern? 
A1 It is assumed for accounting purposes a business will continue indefinitely. If the 
concern is not liquid, the viability and therefore sustainability of that entity being able to 
continue its operations in the future may be doubt. This assumption will affect the 
accountant's decision on some of the assertions of balance sheet items, e.g. valuation 
and classification.  
 
If an entity is deemed to be unable to continue as a going concern, there would not be 
prepaid expenses in the accounts and all such prepayments should be written off to the 
income statement. In addition PPE and other non-current assets would not be stated at 
cost less accumulated depreciation and accumulated impairment losses, they would need 
to be stated at net realizable value. Long-term liabilities too, need to be reclassified to 
current liabilities 
 
Q2 what is the basic accounting equation? 
A2 The basic accounting equation, also called the balance sheet equation, represents 
the relationship between the assets, liabilities, and owner's equity of a business. It is the 
foundation for thedouble-entry bookkeeping system. For each transaction, the total 
debits equal the total credits. It can be expressed as 
 
[1]
 
 
 
 Q3 What is matching concept? 
A3 Matching Principle requires that expenses incurred by an organization must be 
charged to the income statement in the accounting period in which the revenue, to which 
those expenses relate, is earned.