VERY SHORT ANSWER QUESTIONS
Q.1. What do you understand by Accounting concepts?
Ans: Accounting concepts are the necessary assumptions and ideas which are fundamental to accounting.
Q.2. Explain Dual Aspect Concept.
Ans:Ans. Every transaction has two aspects a debit and a credit of equal amount. It means for every debit there is a credit of equal amount in one or more accounts and vice versa. According to Dual Aspect Concept, both the aspects are recorded in the books of accounts.
Q.3. Explain Business Entity Concept.
Ans: According to the Business Entity Concept, proprietor of the business is a separate and distinct entity from business. The transactions are recorded in the hooks of accounts from the point of view of business, not from the point of view of the proprietor.
Q.4. Explain Going Concern Concept.
Ans: According to the Going Concern Concept, it is assumed that the business will continue for a foreseeable future and there is no intention to close or scale down the operations significantly.
Q.5. Explain Historical Cost Concept.
Ans: According to the Historical Cost Concept assets are recorded in the books of accounts at the prices paid to acquire them and it is the basis for all subsequent accounting of the assets.
Q.6. Give two characteristics of accounting principles.
(i) Accounting principles are man made
(ii) Accounting principles are flexible.
Q.7. What is accounting period principle?
Ans: Entire life of an enterprise is divided into time intervals which are known as accounting periods at the end of which a profit and loss account is prepared to ascertain the profit and a balance sheet is prepared to ascertain the financial position.
Q.8. Explain Accounting Period Concept.
Ans: According to the Accounting Period Concept, life of the business is broken into smaller periods (one year) so that its performance is measured at regular intervals.
Q.9. Explain Consistency Convention.
Ans: According to the Consistency Convention, accounting practices once selected and adopted should be applied consistently year after year.
Q.10. Explain Money Measurement Concept.
Ans: According to the Money Measurement Concept, transactions and events that can be measured in terms of money are recorded in the books of accounts.
Q.11. Explain Accrual Concept.
Ans: According to the Accrual Concept, a transaction is recorded in the books of accounts at the time when it is entered into and not when the settlement takes place. For example, sales made on credit will be recorded in the books of accounts on the date of sales, not when the amount is received.
Q.12. Explain Principle of Matching Revenue with Cost.
Ans: According to the Matching Concept, cost incurred to earn revenue should be recognised as expense in the period when revenue is recognised as earned.
Q.13. Why is it necessary for accountants to assume that a business entity will remain a going concern?
Ans: Ans. 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.14. How does the Matching Principle apply to depreciation?
Ans: According to the Matching Principle, the expenses for an accounting period are matched against related revenues for the determination of profit. On account of this principle, the purchase price of the fixed asset is not taken but only depreciation on fixed asset related to the accounting period is taken.
Q.15. Why should a business follow the consistency principle?
Ans: Comparability is a qualitative characteristic of a financial statement, i.e., the financial performance of a year may be compared with that of another year. It is possible only when accounting practices are consistently followed.
Q.16. Explain any three of the following accounting conventions:
(i) Full Disclosure
(iii) Materiality and
(i) According to the Convention of Full Disclosure, all significant information relating to the economic affairs of the entity should be reported in the financial statements in an understandable manner.
(ii) According to the Convention of Consistency, accounting practices once selected and adopted should be consistently applied year after year.
(iii) According to the Convention of Materiality, a transaction should be reported in the financial statements on the basis of its materiality. An item is material if it can influence the decision of the user.
(iv) According to the Convention of Conservatism, anticipated losses should be accounted while anticipated incomes should not be accounted.
Q.17. Give the meaning of 'Full Disclosure' Principal of Accounting.
Ans: According to the Convention of Full Disclosure, all significant information relating to the economic affairs of the entity should be reported in the financial statements in an understandable manner.
Q.18. What is principle of prudence or conservatism?
Ans: All anticipated losses should be recorded in the books of accounts. But all anticipated or unrealized gains should be ignored.
Q.19. ‘Closing stock is values at lower of cost or realizable value’. Which principle of Accounting is applied here?
Ans: Principle of Prudence or Conservatism.
Q.20 Why should a business follow the consistency principle?
Ans: One of the qualitative characteristic of accounting information is comparability i.e., the financial statements must be comparable from year to year. It is possible only when accounting principles are not changes and followed consistency year after year.
Q.21. State one limitation of historical cost.
Ans: During periods of inflation, the figure of net profit will be distorted because depreciation based on historical cost will be charges against revenues at current prices.