Very Short Answer Type Questions
Q.1. What are the two bases of accounting?
Ans: There are two bases of accounting:
(i) Cash Basis and (ii) Accrual Basis.
Q.2. What do you understand by Cash Basis of Accounting?
Ans: Cash Basis of Accounting means that the entry is recorded on receipt or payment of cash. The system does not distinguish between capital and revenue items. It also does not recognise prepaid expenses and outstanding expenses.
Q.3. What do you understand by Accrual Basis of Accounting?
Ans: Accrual Basis of Accounting means the transaction is recorded at the time when it is entered into and not when the settlement takes place. In other words, under Accrual Basis of Accounting, accounting entries are recorded when incomes are earned and expenses are incurred irrespective of cash received or paid.
Q.4. Distinguish between Cash Basis and Accrual Basis of Accounting.
Ans: (i) Both cash and credit transactions are recorded under the Accrual System of Accounting. Under the Cash System of Accounting only cash transactions are recorded.
(ii) Capital and revenue items are distinguished under the Accrual System of Accounting. Under the Cash System of Accounting no such distinction is made.
Q.5. What are the advantages of Cash Basis of Accounting? (Two Points)
Ans: Advantages of Cash Basis of Accounting are:
(i) It is a simple system as adjustments are not required.
(ii) It is more objective as very few estimates and judgments are made.
Q.6. What are the disadvantages of Cash Basis of Accounting? (Two Points)
Ans: Disadvantages of Cash Basis of Accounting are:
(i)It does not give a true and fair view of profit or loss and the financial position.
(ii) It does not follow the matching principle.
Q.7. What are the advantages of Accrual Basis of Accounting? (Two Points)
Ans: Advantages of Accrual Basis of Accounting are:
(i) It gives a true and fair view of profit or loss and the financial position.
(ii) It shows complete picture of financial transactions as it accounts prepaid and outstanding expenses, earned and unearned incomes, assets and liabilities.
Q.8. What are the disadvantages of Accrual Basis of Accounting? (Two Points)
Ans: Disadvantages of Accrual Basis of Accounting are:
(i) The accounting process is more elaborate.
(ii) it is more complicated than Cash Basis of Accounting and requires adequate skills.
Q.9. In which basis of accounting Outstanding expenses are not recorded?
Ans: Cash basis of accounting.
Q.10 Write two advantages of accrual basis of accounting.
(i) It discloses true profit or loss for a particular period.
(ii) It follows the matching principle of accounting.
Q.11. Which basis of accounting is recognised under the Companies Act, 2013.
Ans: Accrual basis of accounting.
Q.12. Does cash basis of accounting violates GAAP? If yes, how?
Ans: Yes, it does not follow matching principle and accrual concept.
Higher Order Thinking Skills (HOTS) Questions
Q.1. Dr. Arvind Kishore, a homeopath doctor in practice has been advised by his Accountant to maintain his accounts on Accrual Basis instead of the presently followed Cash Basis of Accounting. Do you agree with the advice of the Accountant? Give reasons.
Ans: No, I do not agree. Cash Basis of Accounting is more appropriate for Dr. Arvind Kishore because a medical practitioner receives his fee immediately after giving consultancy.
Q.2. M/s. kaIra Bros., a dealer in computer hardware, has received sin order for 10 computers alongwith an advance of Rs.50.000. The firm maintains its accounts on Accrual Basis of Accounting. Should the amount revived, i.e. Rs.50,000 be credited to the Sales Account or the Advance Received Account? Give reasons for your answer.
Ans: It should be credited to the Advance Received Account, and later transferred to the account of purchaser on affecting sale.