TS Grewal Accountancy Class 11 Solution Chapter 2 Basic Accounting Terms

About the Chapter: The concepts relating to Basic Accounting Terms have been explained in Chapter 2 of Class 11 TS Grewal's Accountancy book. This is an important chapter for Class 11 commerce students as it provides basic understanding relating to terms and concepts used in accounting. The students should have strong understanding of these terms so that they can develop very good fundamental understanding of terms used in Accountancy. You will be able to learn about rule of debit credit, meaning of journal, trial balance and various financial statements like balance and profit and loss account etc. Basic understanding about the double entry book keeping process has also been provided in this chapter. It is important that the students learn the concepts explained so that it helps them to set strong foundation of accountancy. Also refer to the answers for all questions given at the end of each chapter below for better understanding of all topics.

Question.1 Distinguish between Loss and Expense.

Answer 1:

Expense is a value which has expired during the accounting period where as a loss is excess of expenses of a period over its related revenues which may arise from normal business activities. 

Question.2 What are Vouchers?

Answer 2:

Vouchers are the evidence of business transactions. The examples of vouchers are cash memo, invoice, bill, receipt, debit notes, credit notes etc. 

Question.3 Distinguish between Opening Stock and Closing Stock.

Answer 3:

Opening Stock is the stock-in-hand in the beginning of the accounting year or it is stock-in-hand at the end of the previous accounting year. Closing Stock is the stock-in-hand at the end of the accounting period.

Question.4 Explain the meaning of any three of the following terms:

(i) Assets (ii) Capital (iii) Goods (iv) Drawings (v)  Debtors

Answer 4:

(i) Assets: Assets are property or legal right owned by an individual or business to which money value can be attached. In other words, anything which will enable the firm to get cash or a benefit in the future is an asset. Example of assets is land, building, machinery, furniture, stock, debtors, cash and bank balance etc.

(ii) Capital: Capital is the amount invested by the proprietor or the partner in the business. It may be in form or money or assets having money value. It is a liability of business towards proprietor or the partner. It is so because under “Business Entity Concept”, business is considered to be a separate and distinct entity from its owners. It is always equal to assets less liabilities.

(iii) Goods:Goods are the physical item of a trade it is term of the items making up the sales or purchases of a business. They are thus Stock-in-trade of an enterprise, which are purchased or manufactured with a purpose of selling. For an enterprise dealing in home appliances such as air conditioners, fridge, utensils etc. are goods. Similarly, for a stationer, stationery is goods.

(iv) Drawings:It is the amount withdrawn or goods taken by the proprietor for his personal use. Goods so taken by the proprietor are valued at purchase cost. Drawings reduce the investment or capital of the owners.

(v) Debtors:A person who owes amount to the enterprise on account of credit sales of goods or services is called a Debtor. For example, when goods are sold to a person on credit that person is called a debtor because he owes the amount to the enterprise. The amount due us known is debt.

Question.5 Explain the following terms:

(i) Revenue (ii) Debtors (iii) Fictitious Assets (iv) Working Capital 

Answer 5:

(i) Revenue: Revenue means the amount, which as a result of operations, i.e., sale of goods or service, is added to the capital. Revenue is an inflow of assets, which result in an increase in the owner’s equity. Examples of revenue are receipts from sale of goods, rent, commission, etc.

(ii) Debtors: A person who owes amount to the enterprise on account of credit sales of goods or services is called a Debtor. For example, when goods are sold to a person on credit that person is called a debtor because he owes the amount to the enterprise. The amount due us known is debt.

(iii) Fictitious Assets: Fictitious assets are those assets which are neither tangible assets nor intangible assets but represent loss or expenses yet to be written off. Examples are: Debit balance of profit and loss account and Deferred Advertisement Expenditure etc.

(iv) Working Capital: Working Capital is the amount of investment required to take care of day-to-day business expenses. The difference between current assets and current liabilities are called Working Capital.

Question.6 Explain the meaning of nay three of the following terms:

(i) Liability (ii) Stock (iii) Business Transaction (iv) Drawings

Answer 6:

(i) Liability: Liabilities mean the amount owned (payable) by the business to outsides and to the proprietors. Various kinds of liabilities are internal liability, external liability, long term liability, current liability and contingent liability. Internal liability is the amount owned by business to the proprietor of the business. External liability is a liability that is payable to outsiders, i.e., other than the proprietors. Long-term liabilities are those liabilities which are payable after a longer period, say more than a year. Current liabilities are those liabilities which are payable within a year. Contingent liabilities are those liabilities which may or may not arise in future depending on the happening of an event. These are shown as a footnote of the Balance Sheet. 

(ii) Stock: Stock is tangible assets here where enterprise for the purpose of sale in the ordinary course of business of for the purpose of using it in the production of goods meant for sale. Stock may be Opening Stock or Closing Stock. Opening Stock is the stock-in-hand in the beginning of the accounting year. In other words, it is stock-in-hand at the end of the previous accounting year. Closing Stock is the stock-in-hand at the end of the accounting period. Work-in-Progress is a stock is classifies in the Balance Sheet as a current asset. The stock is valued on the basis of “cost or market price whichever is lower” principle.

(iii) Business Transaction:Term Business Transaction means if financial transaction or event entered into by the parties and recorded in the books of accounts. It is a financial event, which can be expressed in term of money are bring change in the financial position of an enterprise. It is concerned with two parties or accounts involving the transfer or exchange of goods or services. 

(iv) Drawings:It is the amount withdrawn or goods taken by the proprietor for his personal use. Gods so taken by the proprietor are valued at purchase cost. Drawings reduce the investment or capital of the owners.

Question.7 Explain and give example of each of the each of the following accounting terms:

(i) Expenses (ii) Drawings (iii) Gain 

Answer 7:

(i) Expenses: Expense is a value which has expired during the accounting period. It may be cash payment such as salaries, wages, rent etc. writing off a part of fixed assets (depreciation), an amount written off out of a current asset (say bad debts), decline in the value of assets (say investments) and cost of goods sold. An expense is charged (debited) to profit and loss account. 

(ii) Drawings:  It is amount withdrawn or goods taken by the proprietor for his personal use. Goods so taken by the proprietor are valued at purchase cost. Drawings reduce the investment of capital of the owners. 

(iii) Gain:  Gain is a profit of irregular or non-recurrent nature. For example, profit on sale of fixed asset or investment.

Question.8 Define the following basic accounting terms with example:

(i) Revenue (ii) Drawings (iii) Profit 

Answer 8:

(i) Revenue: Revenue means the amount, which as a result of operations, i.e. sale of goods or services, is added to the capital. Revenue is an inflow of assets, which result in an increase in the owner’s equity. Examples of revenue are receipts from sale of goods, rent, commission etc. 

(ii) Drawings: It is amount withdrawn or goods taken by the proprietor for his personal use. Goods so taken by the proprietor are valued at purchase cost. Drawings reduce the investment of capital of the owners. 

(iii) Profit: It is the excess of revenue of a business over its cost. Profit is normally categorised into gross profit and net profit. Gross Profit is the difference between sales revenue and the proceeds of goods sold or services rendered over its direct cost. Net Profit is the profit made after allowing for all expenses. In case expenses are more than the revenue it is loss.

Question.9 Explain the following terms with example:

(i) Sales (ii) Cost 

Answer 9:

(i) Sales: The term ‘Sales’ is associated with or used for sale of goods that are dealt with by the firm. The term ‘Sales’ includes both cash and credit sales. When goods are sold for cash, they are termed as cash sales and when sold on credit, they are termed as Credit Sales. 

(ii) Cost: Cost is the amount of expenditure incurred on or attributable to a specified article, product or activity. There are two type of costs i.e., direct and indirect. The total of two costs constitutes the total cost.

Question. 10 Write a note on type of assets with one example of each.

Answer 10:

(i) Non-current Assets: These assets are held by a business not with a purpose to resell but either as investment or to facilitate business operation. For the example- non-current investments.

(ii) Tangible Assets: Tangible assets are those assets which have physical existence like they can be seen and touched. For the example- Land

(iii) Intangible Assets: Intangible assets are those assets which do not have physical existence like they cannot be seen and touched. For the example- trademark.

(iv) Current Assets: Current assets are those assets which are held by the business with the purpose of converting them into cash within a short period of time say one year. For the example- stock.

(v) Fictitious Assets: Fictitious assets are those assets which are neither tangible assets nor intangible assets but represent loss or expenses yet to be written off. Examples are: Debit balance of profit and loss account and Deferred Advertisement Expenditure etc.

Question.11. Explain the following term with examples:

(a) Capital Expenditure

(b) Non-current Assets 

Answer 11:

(a) Capital Expenditure:- It is an expenditure incurred to acquire assets or improving the existing assets which will increase the earning capacity of the business, i.e., will give benefit of enduring nature to the business. It may be incurred to acquire tangible assets or intangible assets. They are shown in the Balance Sheet of the entity. Capital Expenditure is shown on the assets side of the Balance Sheet.

(b) Non-current Assets:- Non-current Assets are those assets which are held by an entity or enterprise not with the purpose to resell but are held either as investment or to facilitate business operations. In other words, those assets are held by the business form a long-term point of view. Examples of non-current assets are fixed assets, Non-current Investments, Long-term Loans and Advances and Other Non-current Assets. 

Practical Problems......................

Question.1.   Mr.Gopal started business for buying and selling of readymade garments with Rs. 8,00,000 as an initial investments. Out of this he paid Rs. 4,00,000 for the purchase of garments and Rs. 50,000 for furniture andRs. 50,000 for computers and the remaining amount was deposited into the bank . He sold some of the ladies and kids garments for Rs.3,00,000 for cash and some garments for Rs. 1,50,000 on credit to Mr. Rajesh.

Subsequently, he bought men's garments of Rs. 2,00,000 from Mr.Satish . In the first week of the next month, a fire broke out in his office and stock of garments worth Rs. 1,00,000 was destroyed . Later on, some garments which cost Rs. 1,20,000 were sold for Rs. 1,30,000. Expenses paid during the same period were Rs. 15,000. Mr.Gopal withdrew Rs. 20,000 from business for his domestic use. 
From the above, answer the following:
(i) What is the amount of capital with which Mr.Gopal started the business ?
(ii) What fixed assets did he buy?
(iii) What is the value of goods purchased?
(iv) Who is the creditor and state the amount payable to him?
(v) Who is the debtor and what is the amount receivable from him?
(vi) What is the total amount of expenses?
(vii) What is the amount of drawings of Mr.Gopal?

Answer 1:

(i)             Rs. 8,00,000 is the amount of capital which Mr.Gopal started the business. 

(ii)            Total Purchases of Fixed Assets

Furniture = Rs. 50,000

Computer= Rs. 50,000

Total Fixed Assets = Furniture + Computer

                             = 50,000+50,000 =1,00,000

     (iii) Total Value of goods purchased = Cash Purchase +Credit Purchase
                                                           = 4,00,000 + 2,00,000
                                                           = Rs 6,00,000

    (vi) Mr.Satish is the Creditor and  the total payable amount to Creditor (Mr.Satish) is Rs. 2,00,000.

    (v) Mr. Rajesh is the debtor and total receivable amount from Debtor (Mr. Rajesh) is Rs. 1,50,000.

(vi) Total Expenses = Rs 15,000.

(vii) Total amount of drawings by Mr.Gopal is Rs 20,000.