CBSE Class 11 Accountancy HOTs Theory Base of Accounting

Question. How is the total amount of Capital calculated?
Answer : Capital = Assets – Liabilities

Question. Give 2 examples of Capital receipts.
Answer : • The amount received by way of loans
• The amount received from the sale of fixed assets or investments

Question. What are the drawings?
Answer : Drawings refer to any value of commodities or cash withdrawn by the owner for personal use.

Question. The amount which the proprietor has invested in a business is known as,
Answer : Capital

Question. What is income?
Answer : Excess of revenue over expenses is called as Income. Income = Revenue – Expenses

Question. What are the different bases of accounting?
Answer : Different bases of accounting are,
• Cash basis
• Accrual basis

CBSE Class 11 Accountancy Chapter 2 Theory Base of Accounting MCQs

Question. The revenue is assumed to be realised when a legal right to receive it arises under the:
a) Realisation Concept
b) Matching Concept
c) Cost concept
d) Dual Aspect
Answer. A

Question. The concept that states the revenue and the expenses incurred to earn the revenue must belong to the same accounting period for ascertaining profit/loss for that year.
a) Revenue Recognition
b) Matching
c) Full Disclosure
d) Cost
Answer. B

Question. The Indian Company’s Act 1956 and SEBI, has provided a format for the preparation of Profit/Loss and Balance sheet of the Company which can enable the users to make correct assessment about the profitability and financial soundness of the enterprise under the Accounting concept popularly known as
a) Materiality
b) Conservatism
c) Full Disclosure
d) Consistency
Answer. C

Question. The concept that states that the reasonable material facts that disclose through the financial statement and the informing notes is:
a) Materiality
b) Full Disclosure
c) Consistency
d) Prudence
Answer.  A

Question. Identify the concept that requires the documentary evidence for the accounting transaction which is supported by verifiable documents or vouchers.
a) Materiality
b) Objectivity
c) Full Disclosure
d) Consistency
Answer. B

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

According to Business entity Principle even the proprietor of the business is treated as Creditor of the business. True
1. Accrual Concept is based on matching principle. True
2. Under Cash Basis of Accounting, Outstanding and prepaid expenses are adjusted. False
3. Under Accrual Basis of accounting, Expenses are recorded on being incurred. True
4. Due to Money Measurement Concept, Asset is recorded at cost Price. False
5. Accounting standard is an authoritative statement issued by ICAI. True
6. According to Business Entity Concept, Capital is treated as liability of business. True
7. Accounting Standards helps in eliminating variations in accounting treatment to prepare Financial Statements. True
8. While preparing financial statements Cooperative Society follows Accounting Standards. True
9. The fact that a business is separate and distinguishable from its owners is best exemplified by the Business entity Concept. True
10. Recognition of expenses in the same period as associated revenues is called Objectivity concept. False
11. The Consistency concept requires that same method of charging deprecation on asset should be adopted year after year. True

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

Question. The ____________ assumption of accounting states that if straight line method of depreciation is followed in one accounting year, then it should be continued in the next year also.
Answer. Consistency

Question. Everything a firm owns, it also owns out of somebody. This co – incidence is explained by the ____________ concept.
Answer. Dual Aspect

Question. Salary to manager will be recorded in the books of accounts but appointment of manager is not recorded due to _____________ concept.
Answer. Money Measurement

Question. Outstanding and prepaid expenses are adjusted according to _______ basis of accounting.
Answer. Accrual

Question. The closing stock is valued at cost price or market price whichever is _________.
Answer. lower

Question. Small business organizations follow _____________ entry system of accounting.
Answer. single

Question. A charitable institution follows _________ basis of accounting.
Answer. Cash

Question. Posting into Ledger comes under _____________ step of accounting process.
Answer. Classifying

Question. Summarizing means preparing of _______________ to check arithmetical accuracy.
Answer. Trial Balance

Question. Recording can be done in Journal and __________ books.
Answer. Subsidiary

Question. True value of profit and loss is identified in __________ basis of accounting.
Answer. Accrual

Question.  __________ concept assumes that business would not be liquidated in the foreseeable future.
Answer. Going concern

Question. X Ltd. produces its financial statements on 31st March every year in accordance to ____________ concept.
Answer. Accounting Period

CBSE Class 11 Accountancy Chapter 2 Theory Base of Accounting Match The Following

Question.
1. Mohan had cash sales of Rs. 90,000 and credit sales       a) Rs. 50,000 as per cash basis
of Rs. 60,000: and his expenses were Rs. 70,000 out
of which 30,000 is yet to be paid. Find the profit earned
if books are mentioned on cash basis.
2. Mohan had cash sales of Rs. 90,000 and credit                b) Rs. 60,000 as per cash basis
sales of Rs. 60,000: and his expenses were Rs. 70,000
out of which 10,000 is only paid. Find the profit earned if
books are mentioned on cash basis.
                                                                                               c) Rs. 80,000 as per cash basis
Answer. 1-a ;2-c

Question.
1. Life of the business is broken into small parts       a) Matching principle
2. Purchase of Calculator/eraser/pencils will             b) Accounting period
not be recorded as an assets   
                                                                                  c) Business entity
                                                                                  d) Materiality concept
Answer. 1-b; 2-d

Question.
1. Sale is recognized on the basis of cash memo which concept is applied.     a) Dual Aspect concept
2. Purchase of goods on credit from Raja will be debited to purchase               b) Verifiable evidence objective.
and credited to Raja which concept is applied.
                                                                                                                            c) Materiality Concept
                                                                                                                            d) Cost Concept
Answer. 1-b; 2-a

Question.
1. As per cost concept, calculate the amount to be recorded           a) 50,00,500
when 5 computers are purchased for Rs. 30,000 each and
spend Rs. 2,000 each on installation and Rs. 1,000 as carriage
to deliver 5 computers.
2. As per Materiality concept, calculate the amount of assets,         b) 50,00,000
if firm purchased 20 acres of land for Rs.50,00,000 and 10
pencils for Rs. 50 .
                                                                                                          c) 1,61,000
                                                                                                          d) 1,53,000
Answer. 1-c; 2-b

Question.
Which principle is violated here?
1. Directors are interested to change the method of           a) Revenue recognition principle
depreciation from WDV to SLM on Machinery in the
current accounting.
2. At the end of the accounting period, factory rent of        b) Consistency Concept
the company is outstanding for Rs. 10,000
                                                                                           c) Accrual concept

Answer. 1-b; 2-c

Meaning of GAAP: Accounting principles, concepts and conventions are commonly known as Generally Accepted Accounting Principles (GAAP). These principles are the base of Accounting. Generally Accepted Accounting Principles (GAAP) refer to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity and consistency in the preparation and the presentation of financial statements.

Fundamental Accounting Assumptions

1. Going Concern Assumption: 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.
Relevance:
1. Distinction is made between capital expenditure and revenue expenditure.
2. Classification of assets and liabilities into current and non-current.
3. Depreciation is charged on fixed assets and fixed assets appear in the balance sheet at book value, without having reference to their market value.

2. Consistency Assumption: According to this assumption, accounting practices once selected and adopted, should be applied consistently year after year. This will ensure a meaningful study of the performance of the business for a number of years. Consistency assumption does not mean that particular practices, once adopted, cannot be changed. The only requirement is that when a change is desirable, it should be fully disclosed in the financial statements.
Relevance: It helps the management in decision-making as they can compare the financial information of current year with that or previous years.

3. Accrual Assumption: As per Accrual assumption, all revenues and costs are recognized when they are earned or incurred. It is immaterial, whether the cash is received or paid at the time of a transaction or on a later date. e.g., if a credit sale (Credit for two months) for ₹ 15,000 is made on 15th Feb. 2019, then the revenue earned is to be recorded on 15th Feb. 2019, not on the date when cash is realized, i.e., after two months. In case of expenses, if at the end of the year, salary for two months is due but not paid, then the expenses of salary will be recorded in the current year in which the salary is due, not in the next year when it will be paid.
Relevance: Earning of revenue and consumption of a resource (expenses) can be accurately matched to a particular accounting period.

Accounting Principles

1. Accounting Entity: 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. The owner is treated as a creditor (Internal liability) for his investment in the business,
i.e. to the extent of capital invested by him. Interest on capital is treated as an expense like any other business expense. His private expenses are treated as drawings leading to reduction in capital.

2. Money Measurement Principle: According to this principle, only those transactions that are measured in money or can be expressed in terms of money are recorded in the books of accounts of the enterprise. Non-monetary events like death of any employee/manager, strikes, disputes etc., are not recorded at all, even though these also affect the business operations significantly.
Limitations:
1. It ignores the qualitative aspect e.g., efficient human resources (Assets), satisfied customers (Assets) and dishonest employees (liabilities).
2. Value of money (currency) is not stable.
To make accounting records simple, relevant, understandable and homogeneous, facts are expressed in a common unit of measurement i.e., money, which is not stable.

3. Accounting Period Principle: According to this principle, the life of an enterprise is divided into smaller periods so that its performance can be measured at regular intervals. These smaller periods are called accounting periods. Accounting period is defined as the interval of time, at the end of which the profit and loss account and the balance sheet are prepared, so that the performance is measured at regular intervals and decisions can be taken at the appropriate time. Accounting period is usually a period of one year.
Relevance:
1. This Assumption requires the allocation of expenses between capital and revenue.
2. Portion of capital expenditure that is consumed during the current year is charged to the Income Statement and the remaining portion i.e., the unconsumed portion is shown as an asset in the Balance Sheet.
3. As per the income tax law, tax on income is calculated on annual basis from 1st April to 31st March (Financial Year).
4. Timely decision for corrective measures can be taken by the management by using these financial statements.

4. Full Disclosure Principle: According to this principle, apart from legal requirements, all significant and material information related to the economic affairs of the entity should be completely disclosed in its financial statements and the accompanying notes to accounts. The financial statements should act as a means of conveying and not concealing the information. Disclosure of information will result in better understanding and the parties may be able to take sound decisions on the basis of the information provided.
e.g., footnotes such as:
1. Contingent liabilities in respect to a claim of a very big amount against the business are pending in a Court of Law.
2. Change in the method of providing depreciation.
3. Market value of investment.

5. Materiality Principle: 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. According to this principle, only those items or information should be disclosed that have a material effect and are relevant to the users. So, an item having an insignificant effect or being irrelevant to user need not be disclosed separately, it may be merged with another item. If the knowledge about any information is likely to affect the user’s decision, it is termed as material information.
It should be noted that an item material for one enterprise may not be material for another enterprise, e.g., an expense of ₹ 50,000 is immaterial for an enterprise having sales of ₹ 100 crores but it is material for an enterprise with sales of ₹ 10,00,000.

6. Prudence Principle: According to this principle, prospective profit should not be recorded but all prospective losses should immediately be recorded. The objective of this principle is not to overstate the profit of the enterprise in any case i.e., do not anticipate any profits but anticipate for all possible losses. This concept ensures that a realistic picture of the company is portrayed. When different equally acceptable alternative methods are available, the method having the least favourable immediate effect on profit should be adopted. e.g.,
1. Valuation of stock at cost or realizable value, whichever is lower.
2. Provision for doubtful debts and provision for discount on debtors is made.

7. Cost Principle: According to this Principle, an asset is recorded in the books of accounts at its original cost comprising of the cost of acquisition and all the expenditure incurred for making the assets ready to use. This cost becomes the basis of all subsequent accounting transactions for the asset, since the acquisition cost relates to the past, it is referred to as the historical cost.
e.g., Machinery was purchased for ₹ 1,50,000 in cash and ₹ 20,000 was spent on the installation of machine, then ₹ 1,70,000 will be recorded as the cost of machine in the books and depreciation will be charged on this cost. If the market value of the machine goes up to ₹ 2,00,000 due to inflation, then the increased value
will not be recorded. This cost is systematically reduced year after year by charging depreciation and the assets are shown in the Balance Sheet at book value (cost - depreciation).

8. Matching Principle: According to this principle, all expenses incurred by an enterprise during an accounting period are matched with the revenues recognized during the same period.
The matching principle facilitates the ascertainment of the amount of profit earned or loss incurred in a particular period by deducting the related expenses from the revenue recognized in that period.
The following treatment of expenses and revenues are done due to matching principle.:
1. Ascertainment of Prepaid Expenses.
2. Ascertainment of Income received in advance.
3. Accounting of closing stock.
4. Depreciation charged on fixed assets.

9. Dual Aspect Principle: According to this principle, every business transaction has two aspects - a debit and a credit of equal amount. In other words, for every debit there is a credit of equal amount in one or more accounts and vice-versa. The system of recording transactions on the basis of this principle is known as “Double Entry System”. Due to this principle, the two sides of the Balance Sheet are always equal and the following accounting equation will always hold good at any point of time.
Assets = Liabilities + Capital
e.g., Ram started business with cash ₹ 1,00,000. It increases cash in assets side and capital in liabilities- side by ₹ 1,00,000.
Assets (₹ 1,00,000) = Liabilities + Capital (₹ 1,00,000)

Bases of Accounting

There are two bases of ascertaining profit or loss, namely: (1) Cash Basis, and (2) Accrual Basis.

1. Cash Basis of Accounting: Under this system of accounting, transactions are recorded in the books of accounts only on the receipt/ payment of cash. The income is calculated as the excess of actual cash receipts (in respect of sale of goods, services, properties etc.) over actual cash payments (regarding purchase of goods, expenses, rent, electricity, salaries etc.). Entry is not recorded when a payment or receipt is merely due i.e., outstanding expenses, accrued incomes are not treated. This method is contradictory to the matching principle.

2. Accrual Basis of Accounting: Under this system of accounting, revenue and expenses are recorded when they are recognized i.e., income is recorded as income when it is accrued (when transaction takes place) irrespective of the fact whether cash is received or not. Similarly, expenses are recorded when they are incurred or become due and not when the cash is paid for them. Under this system, expenses such as outstanding expenses, prepaid expenses, accrued income and income received in advance are identified and taken into account. Under the Companies (amendments) Act 2013, all companies are required to maintain their accounts according to accrual basis of accounting.

Difference between accrual basis of accounting and cash basis of accounting

Concept of Accounting Standards

Accounting standards are written statements, issued from time-to-time by institutions of accounting professionals, specifying uniform rules and practices for drawing the financial statements.

Objectives of Accounting Standards

1. Accounting standards are required to bring uniformity in accounting practices and policies by proposing standard treatment in preparation of financial statements.

2. To improve reliability of the financial statements: Statements prepared by using accounting standards are reliable for various users, because these standards create a sense of confidence among the users.

3. To prevent frauds and manipulation by codifying the accounting methods and practices.

4. To help Auditors: Accounting standards provide uniformity in accounting practices, so it helps auditors to audit the books of accounts.
IFRS International Financial Reporting Standards
This term refers to the financial standards issued by International Accounting Standards Board (IASB). It is the process of improving the financial reporting internationally to help the participants in the various capital markets of the world and other users.

IFRS Based financial Statements

Following financial statements are produced under IFRS:

1. Statement of financial position: The elements of this statement are-
a. Assets
b. Liability
c. Equity

2. Comprehensive Income statement: The elements of this statement are-
a. Revenue
b. Expense
3. Statement of changes in Equity
4. Statement of Cash flow
5. Notes and significant accounting policies

Main difference between IFRS and IAS (Indian Accounting Standards)
1. IFRS are principle based while IAS are rule based.
2. IFRS are based on Fair Value while IAS are based on Historical Cost.

Goods and Services Tax (GST)
GST is a destination-based tax on consumption of goods and services. The concept of destination-based tax on consumption implies that the tax would accrue to the taxing authority which has jurisdiction over the place of consumption which is also termed as place of supply. There are three main components of GST which are CGST, SGST, CGST means Central Goods and Services Tax. Taxes collected under CGST will constitute the revenues of the Central Government. The present central taxes like central excise duty, additional excise duty, special excise duty, central sales tax etc., will be subsumed under CGST. SGST means State Good and Services Tax. A collection of SGST is the revenue of the State Government. With GST all state taxes like VAT, entertainment tax, luxury tax, entry tax etc, will be merged with GST.
For example, Roma, a dealer in Punjab sell goods to Seema in Punjab worth ₹ 10,000. If the GST rate is 18%, i.e., 9% CGST and 9% SGST, ₹ 900 will go to Central Government and ₹ 900 will go to the Punjab Government.
IGST means Integrated Goods and Services Tax. The revenue collected under IGST is divided between Central and State Government as per the rates specified by the Government. IGST is charged on transfer of goods and services from one state to another. Import of goods and services are also covered under IGST.

Characteristics of Goods and Services Tax
1. GST is a common law and procedure throughout the country under single administration.
2. GST is a destination-based tax and levied at a single point at the time of consumption of goods and services by the end consumer.
3. GST is a comprehensive levy and collection on both goods and services at the same rate with benefit of input tax credit or subtraction of value.
4. Minimum number of rates of tax does not exceed two.
5. There is no scope for levy of cess, resale tax, additional tax, turnover tax etc.
6. There is no multiple levies of tax on goods and services, such as sales tax, entry tax, octroi, entertainment tax or luxury tax etc.

Advantages of Goods and Services Tax
1. Introduction of GST has resulted in the abolition of multiple types of taxes in goods and services.
2. GST widens the tax base and increased revenue to Centre and State thereby reducing administrative cost for the Government.
3. GST has reduced compliance cost and increases voluntary compliance.
4. GST has affected rates of tax to the maximum of two floor rates.
5. GST has removed the cascading effect on taxation.
6. GST will result in enhancing manufacturing and distribution system affecting the cost of production of goods and services and consequently the demand and production of goods and services will increase.
7. It will eventually promote economic efficiency and sustainable long-term economic growth as GST is neutral to business processes, business models, organisational structure and geographical location.
8. GST would help to extend competitive edge in international market for goods and services produced in the country leading to increased exports.