NCERT Solution: Theory Base of Accounting | Accountancy Class 11 - Commerce PDF Download

Short Question Answer

Q1: Why is it necessary for accountants to assume that a business entity will remain a going concern?
Ans: Going Concern is critical for accountants since it leads to the adoption of other business concepts and assumptions, such as the Accrual Concept. The concept of a going concern is based on three basic accounting assumptions.
The first assumption is that the firm is a going concern, which indicates that members may come and go, but the company will continue to exist indefinitely. The business is carried on with the intention to continue it in the long run, rather than to close it down immediately.
Other assumptions and principles must be based on this fundamental assumption. There is no room for the accrual notion of consistency in accounting if the going concern assumption is not established. There will be no depreciation accounting or anything like that. Banks will be hesitant to lend to a company that is projected to cease operations shortly.
If a company is about to close, the treatment of assets will differ; assets, for example, will be valued at market value rather than cost. As a result, the going concern assumption is critical for a corporate entity.

Q2: When should revenue be recognized? Are there exceptions to the general rule?
Ans: Accounting practices are recognized by generally accepted accounting rules when they are either realizable or realized, whichever comes first. It is necessary to recognize revenue once it is realizable or realized, according to generally accepted accounting principles. This recognition is based on the accrual accounting concept.

For example, if Ram sells an item to Shyam in April and Shyam receives the money in July, Ram can recognize the payment in April if the invoices are properly transferred. If an advance payment had been made to Ram in March, the money would serve as a liability for his business until the goods are delivered to Shyam. Thus, the revenue in this scenario would be recognized only in April, when the products are delivered.

This general rule has three exceptions:

1. When a business engages in the Instalment / Hire Purchase system, revenue is recognized as and when the installment is due and received.
2. In cases where revenue is recognized by a firm or business at multiple stages of production, such as in the construction industry.
3. When a business uses the cash basis of accounting, revenue is recognized only when cash is received.

Q3: What is the basic accounting equation?
Ans: The accounting equation is a crucial aspect of the balance sheet that serves as the foundation for the bookkeeping method of double entry.
Every debit must be matched by an equal credit, according to the basic accounting equation. It can be expressed as:
Assets = Capital + Liabilities
As a result, the company's total assets equal the shareholder's funds plus all other obligations.

Q4: The realization concept determines when goods sent on credit to customers are to be included in the sales figure to compute the profit or loss for the accounting period. Which of the following tends to be used in the 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 your reasons.
Ans: Option B, i.e., invoiced, is the correct answer.
According to the realization concept, revenue should be recognized once it is realizable or realized, whichever comes first. Therefore, invoicing can be used by an organization to determine and acknowledge a transaction, as it implies that ownership of the items has been properly transferred. After invoicing, the concerned firm does not need to retain the payment.

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. 
(iii) Everything a firm owns, it also owns out to somebody. This coincidence is explained by the _________ concept. 
(iv)The ___________ concept states that if the 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 that 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 firm’s accountants cannot take this into account while preparing a book of accounts because of ____________concept.
Ans: 
(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 coincidence is explained by the dual aspect concept. 
(iv) The consistency concept states that if the 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 that is heavily in demand. Consequently, the market value of this stock may be increased. Normal accounting procedure is to ignore this because of conservatism.
(vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the realization.
(vii) The management of a firm is remarkably incompetent, but the firm’s accountants cannot take this into account while preparing a book of accounts because of the money measurement concept.

Long Question Answer

Q1: The accounting concepts and accounting standards are generally referred to as the essence of financial accounting. Comment.
Ans: Financial accounting begins with the process of recording a transaction and continues with stages such as categorizing, measuring, summarizing, and generating final accounts, among others. The primary goal of financial accounting is to offer information to a variety of users. Reliability, comparability, comprehension, and relevance are all attributes that must be present in the data that is disseminated. As a result, to assure the quality of accounting processes, a set of principles and guidelines must be followed to provide a consistent method of recording transactions. Therefore, the use of accounting concepts such as the Matching Concept, Conservatism Concept, and Dual Aspect Concept must be ensured. For example, there are various methodologies for estimating stock and depreciation that can be used by different businesses. Due to inconsistency and incomparability among company entities, external users may misinterpret financial data.

Q2: Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.
Ans: Financial statements are prepared to provide information on the growth or decline of business activities over time, as well as comparisons such as intra-firm (within the same organization) or inter-firm (between different firms) comparisons. Consistent accounting policies are necessary for accurate comparisons.
To maintain consistency in establishing the financial status of the firm, a consistent practice in compiling financial statements is essential. Consistent accounting practices facilitate decision-making and comparison. For instance, if an organization uses the Straight Line Method of depreciation, it should continue using it rather than switching to the Written Down Value method, to enable year-over-year financial comparisons.

Q3: Discuss the concept based on the premise ‘do not anticipate profits but provide for all losses’.
Ans: The conservatism accounting concept establishes the premise that entities should not expect profits but should account for any losses. This approach enables organizations to foresee and prepare for all possible losses, allowing them to manage uncertain events effectively. As a result, businesses are expected to assess and predict bad debts and offer payment discounts where necessary. Furthermore, inventory is valued at the lower of cost or market price. For instance, if the market price of stock is less than its cost, a loss should be recorded, but if the market price exceeds the cost, profit should not be recognized until the stock is sold. Numerous provisions, such as the provision for debtor discount, are maintained based on the conservatism principle.

Q4: What is the matching concept? Why should a business concern follow this concept?
Ans: According to the matching principle, a company’s costs and revenues should be recorded in the same accounting period in which they are incurred. Revenues should be recognized when they are either realized or realizable, whichever comes first. Similarly, expenses incurred or paid in the same accounting period must be accounted for.
This principle allows companies to accurately determine the cost of goods sold at the end of the accounting period by subtracting the cost of unsold goods from the total cost of production. Properly recognizing these expenses and revenues helps establish the profit or loss for the accounting period. Without the matching principle, profit or loss might be overstated or understated. For instance, if a year’s insurance premium is paid on July 1 and accounts close on March 31, the premium applicable for nine months (July to March) should be considered for the current year. According to the matching principle, the expense of Rs. 900 will be applied for profit calculation, as it is the portion relevant to the current accounting period.

Q5: What is the money measurement concept? Which factor makes it difficult to compare monetary values across years?
Ans: According to the money measurement concept, all transactions that can be recorded in monetary terms should be recorded in the account books. For example, if 12 television sets are purchased for Rs. 10,000 each, the total Rs. 1,20,000 is recorded. Money serves as a common denominator, enabling consistency in accounting records. However, using money as a measurement unit can make comparisons difficult between periods. Qualitative aspects, such as employee skills, product durability, and administrative effectiveness, are excluded from this concept.
The main disadvantage is that only historical costs, i.e., the cost incurred at purchase, are analyzed. This approach overlooks changes in purchasing power, potentially affecting the financial outcomes of the company.