DK Goel Solutions Class 11 Accountancy Chapter 3 Accounting Principles

Short Questions

Question 1.

Solution  1: Financial statement of a company is needed by everyone who belongs to the company. It is necessary to structure this financial statement true and fair. Hence, it is important to follow some rules and guidelines. To maintain uniformity in recording transactions and preparing financial statements, accountants should follow Generally Accepted Accounting Principles.

Question 2. 

Solution  2: The concept assumes that business has different and separate entity from its owners. Thus, for the purpose of accounting, business and its owners are to be treated as two separate entities.

Question 3. 

Solution  3: It necessary for accounts to assume that a business entity will remain a going concern because if it is not happened there no difference between assets and stock (goods). We assume that assets are not going to be sold in the near future.

Question 4. 

Solution  4: The basic accounting equation is:-

Assets = Liabilities + Capital

Question 5. 

Solution  5: The characteristics of Accounting Principles are.

(1) Accounting principles are manmade. These principals are man-made from years of experience and reason.

(2) Accounting principles are flexible in nature. These principles are not static so they have a chance to change with the time according to new policies and needs of the user.

(3) Accounting principles are generally accepted.

Very Short Questions:-

Question 1. 

Solution  1: The two characteristics of accounting principles are

(i) Man-made

(ii) Flexible

Question 2. 

Solution  2: An entity has a separate existence from its owner. According to this principle, business is treated as an entity, which is separate and distinct from its owner. Therefore, transactions are recorded and analysed, and the financial statements are prepared from the point of view of business and not the owner. So, Business is treated as an entity separate and distinct from its owners.

Question 3. 

Solution  3: The concept of money measurement states that only those transactions are happenings in an organisation. Which can be expressed in term of money are to be recorded in the books of accounts. Also the records of the transactions are to be kept not in the physical units but in the monetary units.

Question 4. 

Solution  4: This concept assumes that an enterprise has an indefinite life or existence. It is assumed that the business does not have an intention to liquidate or to scale down its operations significantly.

Question 5. 

Solution  5: Accounting period refers to the span of time at the end of which the financial statement of an enterprise are prepare to know whether it has earned profit or incurred losses during that period and what exactly is the position of its assets and liabilities at the end of that period.

Question 6. 

Solution  6: According to this concept, an asset is recorded in the books of accounts at its purchasing cost added with all the expenditure included for making the assets useful.

For Example:- A machinery Purchases Rs. 40,000 and installation Expenses for this machinery is Rs. 2,000 So, the total cost of machinery is Rs. 42,000.

Question 7. 

Solution  7: According to this concept every business transection has two aspects. One aspect is debit and other is credit.

Example: Ram started business with capital Rs. 2,00,000. It increases cash in assets side and capital in liabilities- side by Rs. 2,00,000.

Rs. 2,00,000 (Cash) = Rs. 2,00,000 (Capital).

Question 8. 

Solution  8: According to matching concept every expenses incurred in an accounting period should be matched with revenues during the same period. All the expenses paid during a particular period should be charged to revenue of the period for determining the net profits.

Question 9. 

Solution  9: According to matching concept every expenses incurred in an accounting period should be matched with revenues during the same period. Depreciation for the current year is charged against the current year’s revenue. Cost of the asset is not a expense in the year of purchases hence it is separated over its useful life.

Question 10. 

Solution  10: As per Accrual assumption, all revenue and costs are recorded when they are earned or incurred and it is immaterial whether cash is received or not.

Question 11. 

Solution  11: According to this principle there should be complete and understandable recording and reporting on the financial statements of all significant information relating to the financial transaction of the business entity.

Question 12. 

Solution  12: According to this assumption, accounting methods once chooses and adopted, it should be applied consistently year after year. This will ensure a meaningful study of the performance of the business for a number of years. Any accounting practice may be changed if the law or Accounting standard requires so, to make the financial information more meaningful and transparent.

Question 13. 

Solution  13: According to conservatism principle, all the possible profit should not be recorded in the books of accounts but all possible losses should be immediately recorded.

Question 14.

Solution  14: As per this principle only those transactions should be disclosed that have a material effect and are applicable to the users. Disclosure of all material facts is compulsory but it does not imply that even those figures which are irrelevant are to be included in the financial statements. Whether an item is material or not depends on its nature.

Question 15. 

Solution  15: Convention of full disclosure principle states that the financial statements should disclose all significant information’s.

Question 16. 

Solution  16: Convention of Prudence or Conservatism, ‘Closing stock is valued at lower of cost or realisable value’.

Question 17. 

Solution  17: Every business should follow the consistency concept of accounting because financial statements must be comparable from year to year. It is possible only when accounting principles are unchanged and followed the same year after year.

Question 18. 

Solution  18: In historical cost accounting, fixed assets are recorded and presented at the price at which they purchased and ignored the market value of such assets.

Question 19. 

Solution  19: The entire life of business is divided into the time intervals because we can ascertain the revenue expenditure and Capital expenditure and ascertain the amount of profit earned or loss of the business.

Higher Order Thinking Skills (HOTS) Questions

Question 1. 

Solution  1: GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions. GAAP stands for General Accepted Accounting Principles.

Question 2. 

Solution  2: The proprietor of the business is treated as a creditor to the extent of his capital under business entity concept.

Question 3. 

Solution  3: Yes, this information is related to material and should be informed to users of financial statements. So, it must be disclosed as per the convention of full disclosure.

Question 4. 

Solution  4: No, the management is not correct. Only true profits and losses can be recorded in the books of accounts every year. It is divided into particular time period for the ascertainment of profit as per accounting period concept.

Question 5. 

Solution  5: In the Money measurement concept the calibre or quality of the management is not disclosed in the balance sheet.

Question 6. 

Solution  6: Conservatism Principle refers that all anticipated losses should be recorded but all anticipated profits should be ignored.

Question 7. 

Solution  7: As per consistency concept the depreciation is to be charged as per one particular method year after year.

Question 8. 

Solution  8: The full cost of an asset is not treated as an expense in the year of its purchase Because of going concern concept; it is assumed that the business will continue to exist for a long period in the future. Hence, the cost of the asset is spread over its useful life and only the current year’s depreciation is treated as an expense.

Question 9. 

Solution  9: Materiality convention will be followed in dealing with this item. As per the concept, items having an insignificant effect or being irrelevant to the users of financial statements need not be disclosed. Hence, it will be treated as an expense and will be debited to the stationery account.

Question 10. 

Solution  10: Yes, as per the Conservatism Principle, all expected losses should be recorded in the books of accounts. So, in this case an account will be created with the name of provision for doubtful debts.

Question 11. 

Solution  11: Goods withdrawn by the proprietor for his personal use has not been recorded in the books of accounts here the business entity concept will be violated.

Question 12. 

Solution  12: There are two accounting principal should be followed:-

1.) Prudence or Conservatism Principle

2.) Consistency concept

Question 13. 

Solution  13: Yes, the accountant is correct he has followed the materiality convention concept. Those items which have insignificant effect to the business may not be disclosed or may be written off.

Value Based Question(VBQ) Questions:-

Question 1. 

Solution  1: According to Prudence or Conservatism principle closing stock is valued at lower cost price or realisation value.

Question 2. 

Solution  2: According to this principle, prospective profit should not be recorded but all prospective losses should immediately be recorded.

The values involved in following this principle are:-

(i) Not to overstate the profit of the enterprise

(ii) Transparency

Question 3. 

Solution  3: Yes, the convention of conservatism will have two effects:

(i) Profit and loss account shows less profit in comparison of the actual profits.

(ii) The balance sheet shows the undervalued of assets side and overvalued the liabilities side.

Question 4.

Solution  4: If the concept of a separate entity is missing we are unable to find out the net profits of losses, therefore financial position of the business can’t be identified.

Question 5. 

Solution  5: The values involved in the assumption of on-going concern are:-

(i) By this assumption the cost of the asset is not treated as an expense. The cost of the asset is separated over the useful life of it by applying depreciation.

(ii) By this assumption we can find the difference between capital and revenue expenditure.

Question 6.

Solution  6: Fixed assets are not shown in the books at market value because:-

(i) According to historical concept the value of fixed assets recorded at its original cost.

(ii) In the presence of going concept it is assumed that assets are not to be sold in the forthcoming so market value of assets is irrelevant.

Question 7. 

Solution  7: According to this principle, the life of an enterprise is divided into smaller periods so that its performance can be measured at regular intervals.

Question 8. 

Solution 8: In this situation the principle of Prudence or Conservatism is violated.

Question 9. 

Solution  9: Loss of plant and machinery is material information for every business and it should be disclosed. In this situation the company has violated the principle of full disclosure.

Question 10. 

Solution  10: No, this treatment is not correct as per cost concept. According to cost concept a fixed asset is recorded in the books at is original cost.

Question 11. 

Solution  11: No, this treatment is not correct as per Prudence or Conservatism Principle. If the firm is recorded it on its cost then the firm has violated the conservatism principle of accounting. According to this principle current assets are valued at cost price or realisable value whichever is less.

Question 12. 

Solution  12: Yes, the company can change the method and rate of deprecation too. All the changes should be disclosed according to consistency assumption. The only requirement is that when a change is desirable, it should be fully disclosed in the financial statements along with its effect on income statement and Balance Sheet.

Question 13. 

Solution  13: No, According to matching principle Mohan cannot record this transaction as sale because the goods not have been delivered so the transaction is not completed yet. Under the matching concept, revenue is recognized as earned only when the cost incurred to earn that revenue is also recognized as an expense in that period.

Question 14.

Solution 14: The value involved in the full disclosure principle are

(i) Transparency

(ii) Honesty

(iii) Reliability