CBSE Class 11 Accountancy Theory Base of Accounting Assignment

Theory base of accounting comprises of concepts, conventions, principles, rules, standards and guidelines developed, to provide uniformity and consistency to accounting records and enhance its utility, to various users (i.e. internal and external) of accounting information.

1. Generally Accepted Accounting Principles (GAAP)
It refers to the rules or guidelines adopted, for recording and reporting of business transactions, in order to bring uniformity in the preparation and presentation of financial statements.

2. Fundamental Accounting Assumptions
(i) Going Concern Concept/Assumption According to this concept, it is assumed that the business firm would continue its operations indefinitely, i.e. for a fairly long period of time and would not be liquidated in the foreseeable future. All the transactions are recorded in the books on the assumption that it is a continuing enterprise.

(ii) Consistency Concept/Assumption According to the consistency concept, accounting practices once chosen and followed should be applied consistently over the years.
It directly helps the financial statements to be more understandable and comparable.This concept is particularly important when alternative accounting practices are equally acceptable.

(iii) Accrual Concept/Assumption According to this concept, a transaction is recorded at the time, it takes place and not at the time when settlement is done.
In other words, revenue is recorded when sales are made or services are rendered and it is irrelevant as to when cash is received against such sales.
Similarly, expenses are recorded at the time they are incurred and it is irrelevant as to when payment is made in cash for such expenses.

3. Accounting Principles
(i) Business Entity or Accounting Entity (Separate Entity) Principle According to this principle, business is treated as a separate entity distinct from its owners. Recording of accounting information is done, considering this principle.
A separate account by the name of ‘capital’ is maintained for the money invested by the owner in the business.
Business owes money to the owner to the extent of his capital just like it owes money to lenders and creditors who are outside parties to the business.
(ii) Money Measurement Principle
According to this principle, only those transactions which can be expressed in terms of money are recorded in the books of accounts e.g. sale of goods, payment of expenses, receipt of income, etc.
Another aspect of this principle is that the transactions that can be expressed in terms of money have to be converted in terms of money before being recorded.
(iii) Accounting Period Principle Accounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared, to know whether it has earned profits or incurred losses during that period and what exactly is the position of its assets and liabilities at the end of that period. It is also known as periodicity principle or time period principle.
According to this principle, the life of a business is divided into smaller periods so that its performance can be measured on regular basis or intervals.
(iv) Full Disclosure Principle According to this principle, there should be reporting of all the significant information relating to the economic affairs of the business and it should be complete and understandable.
The information disclosed should be material and significant which in turn results in better understanding.
(v) Materiality Principle Materiality principle states the relative importance of an item or an event with respect to the particular business.
An information is material, if it has the ability to influence or affect the decision-making of various parties interested in accounting information contained in financial statements.
It is a matter of judgement to decide whether a particular information is material for a business or not. Also, it depends on the nature and/or amount of that item.
(vi) Prudence or Conservatism
Principle The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the books of accounts and is based on the policy of playing safe.
This principle states that ‘Do not anticipate profits but provide for all possible losses’. In other words, we should make provisions for probable future expenses and ignore any future probable gain until it actually accrues.
(vii) Cost Concept or Historical Cost Principle According to this principle, assets are recorded in the books at the price paid to acquire it. Assets are recorded in the books of accounts at their cost price which includes cost of acquisition, transportation, installation and making the asset ready for use and this cost is the basis for all subsequent accounting of such assets.
(viii) Matching Cost or Matching Principle According to this principle, expenses incurred in an accounting period should be matched with revenues during that period, i.e. when a revenue is recognised in a period, then the cost related to that revenue also needs to be recognised in that period to enable calculation of correct profits of the business.
The matching concept thus, states that all revenues earned during an accounting year, whether received during that year or not and all costs incurred, whether paid during the year or not should be taken into account while ascertaining profit or loss for that year.
(ix) Dual Aspect or Duality Principle Dual aspect is the foundation or basic principle of accounting. According to this principle, every transaction entered by a business has two aspects i.e., debit and credit. There may be more than one debit or there may be more than one credit.
However, the total of all debits and total of all credits will always be equal. In other words, we can say that for every debit, there is always an equal credit. This principle gives rise to the following accounting equation.
Assets = Capital + Liabilities
(x) Revenue Recognition Principle (Realisation Principle) The concept of revenue recognition requires that the revenue for a business transaction should be included in the accounting records only when it is realised.

Revenue is assumed to be realised when a legal right to receive it arises, i.e. the point of time when goods have been sold or service has been rendered.
According to this principle, revenue is considered to have been realised at the time when a transaction has been entered and the obligation to receive the amount has been established.
(xi) Verifiable Objective Concept/Objectivity Concept (Objective by principle) According to this principle, accounting information should be verifiable and should be free from personal bias.
Every transaction should be based on source documents such as cash memo, invoices, sales bills, etc.
These evidences should be objective which means that they should state the facts as they are, without any bias towards either side.

4. System of Accounting
The system of recording transactions in the books of accounts are generally classified into two types
(i) Double Entry System Double entry system is based on the principle of ‘dual aspect’ which states that every transaction has two aspects, i.e. debit and credit. The basic principle followed is that every debit must have a corresponding credit. Thus, one account is debited and the other is credited.
(ii) Single Entry System This system is not a complete system of maintaining records of financial transactions. It does not record two fold effect of each and every transaction. Only personal accounts and cash book are maintained under this system instead of maintaining all the accounts. No uniformity is maintained under this system while recording transactions. The single entry system is also known as ‘accounts from incomplete records’.

5. Basis of Accounting
(i) Cash Basis of Accounting Under the cash basis of accounting, entries in the books of accounts are made, when cash is received or paid and not when the receipts or payment becomes due.
Revenue is recognised at the time when cash is received and not at the time of sale or change of ownership of goods. Expenses are recorded only at the time of actual payments. The difference between total revenue (receipts) and expenses (payments) is profit earned or loss suffered.
(ii) Accrual Basis of Accounting Under accrual basis of accounting, revenue is recognised when sales take place or ownership of goods and services changes whether payment for such sales is received or not, is not relevant. Accrual basis of accounting is based on realisation and matching principle.

6. Meaning of Accounting Standards
Accounting standards are the written statements consisting of uniform accounting rules and guidelines issued by the accounting body of the country (such as Institute of Chartered Accountants of India) that are to be followed in the preparation and presentation of financial statements.
However, the accounting standards cannot override the provision of applicable laws, custom, usages and business environment in the country.

7. Needs/Benefits of Accounting Standards
(i) Basis of preparing financial statements
(ii) Uniformity in accounting methods
(iii) Sense of confidence to various users
(iv) Help to auditors
(v) Simplifying accounting information
(vi) Render reliability to financial statements

8. Limitations of Accounting Standards
(i) There may be a trend towards rigidity.
(ii) These are not flexible.
(iii) Accounting standards cannot override the law.
(iv) Differences in accounting standards are bound to be because of differences in the legal system and traditions from one country to another.

9. Applicability in Ind-AS AS are applicable to all types of organisations engaged in any industrial and business activity except for purely charitable organisations. In order to make economy more dynamic, competitive and boost confidence in international circuit, it is important that the financial statements must be prepared in accordance with certain standards. Due to this reason, accounting standards are being converged with International Financial Reporting Standards (IFRS).

In India too, Ministry of Corporate Affairs in collaboration with Institute of Chartered
Accountants of India (ICAI) established Indian Accounting Standards (Ind-AS).
These are applicable to the certain class of companies under the Companies (Indian Accounting Standards) Rules, 2015 as adopted on 16th February, 2015.

10. Meaning of IFRS International Financial Reporting Standards (IFRS) are issued by International Accounting Standard Board (IASB). IASB replaced International Accounting Standard Committee (IASC) in 2001. IASC was formed in 1973 to develop accounting standards which have global acceptance and make different accounting statements of different countries similar and comparable.

11. Benefits of IFRS
(i) Helpful to global enterprises
(ii) Helpful to investors
(iii) Helpful to industry
(iv) Helpful to accounting professionals

12. Meaning and Definition of Goods and Services Tax (GST) The goods and services tax is a value-added tax levied on most goods and services sold for domestic consumption. It is paid by the consumers. However, it is remitted to the government by the businesses selling the goods and services.

Goods and Services Tax (GST) provides revenue for the government.
The term GST has been defined in Article 366 (12A) to mean ‘‘any tax on supply of goods or services or both except taxes on supply of the alcoholic liquor for human consumption.’’

13. Characteristics of Goods and Services Tax
(i) It is a comprehensive indirect tax.
(ii) GST has four-tier tax rate structure.
(iii) Appropriation of tax revenue between the centre and states.
(iv) Components of GST are Central GST, State GST and Integrated GST (IGST).
(v) Uniform GST rate on goods and services across all states.

14. Objectives of Goods and Services Tax
(i) To eliminate classification dispute between goods and services.
(ii) To bring uniformity in tax rates and automated compliances.
(iii) To ensure availability of input tax credit across the value chain and avoid cascading effect.
(iv) To ensure simplification of registration, filing of return, tax administration and compliance.
(v) To harmonise tax base, laws and administration procedures across the country.
(vi) To minimise tax rate slabs and prevent unhealthy competition among states.
(vii) To ensure free movement of goods across the country without any additional tax.

CBSE Class 11 Accountancy Chapter 2 Theory Base of Accounting MCQs

Question. The accounting data does not reflect the True and fair view of the firm as the heterogeneous value of two different assets that has been purchased in two different year, can’t be clubbed together is the limitation of the concept of:
a) Money Measurement
b) cost
c) Accounting period
d) Matching
Answer. A

Question. The value of a building that has been purchased by the firm for 3 crores, keeps on changing with its market value violates the principle of
a) Historical cost
b) Matching
c) Money Measurement
d) Materiality
Answer. A

Question. The revenue will be recognized when
a) Received an order for the goods worth Rs.50,000 on 1st April’18
b) Goods worth Rs. 50,000 is supplied to the customer on 10th Apr’18
c) Received amount of Rs. 25,000 as from the customer on 15th Apr’18
d) Balance amount is received on 25th Apr’18
Answer. B

Question. Identify the Accounting principle which express the fundamental Accounting Equations
a) Dual Aspect
b) Matching
c) Cost
d) Consistency
Answer. A

Question. According to Dual Aspect State the accounts that affects when the goods are sold to Mr. Mohan.
a) Cash A/c and Stock A/c
b) Debtors A/c and Cash A/c
C) Stock and Debtors
d) Creditors and Stock
Answer. C

Question. According to Revenue Realisation concept
i) Credit sales are treated as revenue on the day sales are made and not when money is received
ii) Rent for the march 14 received in April 14 will be recorded in Profit and Loss A/c in the beginning of the Financial year April14
a) Option (i) is applicable
b) Option (ii) is applicable
c) Both Option (i) and (ii) are applicable
d) None of the options is applicable
Answer. A

Question. According to the Revenue Realization Concept the interest for Apr’18 received in March’14 will be taken in Profit/Loss A/c of the Financial Year
a) Beginning of Apr’18
b) Ending March’18
c) Beginning of March’18
d) Ending of Apr’18
Answer. B

Question. According to the Matching concept, a company show all the expenses related to its revenues of a specified period even if:
a) Expenses were not paid in that period
b) Revenues were not paid in that period
c) Fixed assets were not sold in that period
d) Liabilities were not paid in that period.
Answer. A

Question. i) According to cash basis the receipt or payment becomes due are ignored.
ii) As per the accrual basis the revenue and costs are recognized when it occurred
iii. Office Rent for the month of Dec’18 paid in Jan’19 is recorded in Jan’19.
a) Option (i) and (ii) is the correct statement
b) b) Option (i),(ii) and (iii) is the correct statement
c) Option (i) and (iii) is the correct statement
d) Option (ii) and (ii) is the correct statement
Answer. B

Question. The firm purchased the machine cost Rs. 10,000 and charged depreciation @ 10% according to the Straight line Method. After 2 years they switch to the Written down value method. At the time of sale of machine they calculated the depreciation as per the SLM. Which accounting principle is violated?
a) Historical cost
b) consistency
c) cost
d) money Measurement
Answer. B

Question. The Prudence concept doesn’t implies when the
a) Closing stock is valued at lower cost or market price
b) provision for doubtful debts
c) Anticipation of the bad debts
d) disclosure of the material information.
Answer. D

Question. According to the Going Concern Concept calculate the value of the Computer which has been purchased for Rs 60,000 and estimated its life for five years,
a) Rs 3,00,000
b)12,000
c)6,000
d)60,000
Answer. B

Question. According to the Duality Principle, Calculate the Owner’s claim, if the firms Outsider’s claim is Rs 20,000 and the net worth of the assets that business owns is Rs 70,000.
a)50,000
b)90,000
c)70,000
d)20,000
Answer. A

Question. As per the Duality principle calculate the total outsider’s equity if the raw materials cost Rs. 5000, machine cost Rs. 50,000, Furniture used in the firm cost Rs. 20,000, cash at bank is Rs. 30,000 and the owner’s equity is Rs. 70,000.
a) Rs.35,000
b) Rs. 1,75,000
c) Rs. 70,000
d) Rs. 1,40,000
Answer. B

Question. ABC Ltd. Received an advance on sale in the month of Dec’18 for the sales made in the month of May’19. The sale should recognized on
a) May’19
b) Dec’18
c) Both in May’19 and Dec’18
d) Jan’19
Answer. A

Question. Calculate the Liabilities, If Assets=Rs.1,00,000, capital= Rs. 40,000.
a) Rs.60,000
b) Rs.1,60,000
c) Rs.1,00,000
d) Rs.40,000
Answer. A

Question. Calculate the owner’s equity as per the Business Entity Concept, if the owner commenced the business with the 2 acres of land worth Rs.3crore, building worth Rs. 5crore and Bank balance of Rs. 10 lacks.
a) Rs.8Cr 10 lacks
b) Rs.11crore 10 lacks
c) Rs.10 lacks
d) Rs. 9crore
Answer. A

Question. i) As per the conservatism principle the valuation of stock is at lower of cost or net realizable value.
ii) The convention of conservatism takes all the prospective losses but leaves out prospective profits.
iii) The Dual aspect concept states the proprietor of a business is treated as External liabilities
a) Option (i) and (ii) is correct
b) Option (iii) and (ii) is correct
c) Option (i), (ii) and (iii) is correct
d) Option (i) and (iii) is correct
Answer. A

Question. Calculate the value of the asset at the time of preparing final account that is purchased for Rs. 5,00,000 ,if the market value is Rs. 7,00,000 as per the cost concept.
a) Rs. 5,00,000
b) Rs. 7,00,000
c) Rs.1,20,000
d) Rs. 2,00,000
Answer. A

CBSE Class 11 Accountancy Chapter 2 Theory Base of Accounting Fill in The Blanks  

Question. XYZ Ltd. Received an advance on sale in the month of January, 2019 for the sale made in May, 2019. The revenue should be recognised on __________.
Answer. May, 2019

Question. A Ltd. had shown a contingent liability of Rs 2,00,000 as footnote after it’s Balance Sheet. After analysing Balance Sheet of A Ltd., B Ltd. purchased this running business without any further enquiry. A Ltd. had prepared it’s books by strictly following ________________ convention.
Answer. Full Disclosure

Question. A business purchased goods for Rs 2,00,000 and sold 75% of the goods during accounting year ended 31st March, 2019. The market value of remaining goods was Rs 48,000. He valued closing stock at cost. While recording he violated ____________ concept.
Answer. Prudence

Question. Salary paid Rs 55,000 and outstanding Rs 5,000. At the time of passing journal entry Rs __________ amount will be debited in Salary A/c due to accrual concept.
Answer. Rs 60,000

Question. Ram made cash sales of Rs 2,50,000 and credit sales of Rs 1,50,000. His expenses for the year were Rs 50,000, out of which Rs 10,000 is yet to be paid. Ram’s income on the base of cash basis of accounting will be Rs____________.
Answer. Rs 2,10,000

Question. Shyam made cash sales of Rs 3,20,000 and credit sales of Rs 1,80,000. His expenses for the year were Rs 50,000, out of which Rs10,000 is yet to be paid. Ram’s income on the base of accrual basis of accounting will be Rs____________.
Answer. Rs 4,40,000

Question. Purchase goods of Rs 50,000 and purchase machinery of Rs 5,00,000 are classified under different expenditure category due to going concern concept. Carriage of Rs 1,000 is added to capital expenditure, in this Rs ____ amount is to be debited in purchase A/c.
Answer. Rs 50,000

Question. Anant charged depreciation on his Fixed Assets of Rs 8,50,000 @ 10% p.a. in year 2018. He then charged depreciation in year 2019 at the rate of 12% p.a. Management is facing problem in comparing the data in consecutive years. To solve this problem, Anant should learn about _____ Assumption of accounting.
Answer. Consistency

Question. A Ltd. Purchased goods of Rs 5,20,000 during a financial year. His sales for the year were 6,00,000 and closing stock at the end was Rs 1,20,000. According to matching concept his profit during the year is Rs _______.
Answer. Rs 2,00,000

Question. Rent paid Rs 85,000 out of which Rs 15,000 is related to next year. In the Cash Basis of accounting Rs __________ amount will be debited in Rent A/c.
Answer. Rs 85,000

Question. Accounting period may be either a calendar year from January 01 to December 31 or the _________ year from April 01 to March 31 of the government.
Answer.  financial / fiscal

CBSE Class 11 Accountancy Chapter 2 Theory Base of Accounting True and False  

1. During the Financial year 2018-2019 ABC firm had Cash sales Rs 1,00,000 and Credit sales Rs 20,000. His expenses for the year were Rs 50,000 out of which Rs 30,000 is still to be paid. So according to Cash Basis of Accounting income of ABC firm is 70,000. False
2. Machinery was purchased for Rs 50 lakh. An amount of Rs 1, 00,000 was spent on transporting the machinery to factory site, Rs50, 000 spent on its installation. The total amount at which the Machinery will be recorded is 51, 50,000. True
3. A firm was charging depreciation on its asset according to SLM now changed to WDV but firm did not disclose this information in its financial statements. This has violated the Materiality principle of accounting. True
4. A firm sold goods on credit of Rs 50,000 in the month of January and collected the amount in the month of April. Accountant record this sale in the month of April following Accrual basis of Accounting. Is he correct in doing so. False
5. According to Materiality concept, an ink pot has been purchased by the firm for Rs 5000 treated as revenue expenditure. True
6. Only personal accounts and Cash book are maintained under Double Entry System. False
7. According to Matching Concept, Expense of Rs 20,000 incurred in financial year 2017-2018 but paid in the year 2018-19 considered expense for the year 2017-2018. True
8. Since the life of business is assumed to be indefinite the financial statement of the business should be prepared only when it goes into liquidation. False
9. Purchase of goods amounted to Rs 50,000 on cash increased one asset and reduces the other Asset due to the adherence of Single entry system. False
10. Due to the adherence of Cash Basis system Firm created provision for doubtful debts @ 10 % on its Debtors Rs 2,00,000 . False
11. Rent for the month of March 2018, even if received in April 2019 taken into the financial year ending March 31, 2018 due to the adherence of Revenue Recognition Concept. True
12. Ram, a sole proprietor of M/s Ram & company purchase a car for his personal use. The payment was made by issuing a cheque from the account of M/s Ram & company. His accounted debited to his Drawings Account due to the adherence of Business Entity Concept. True