TS Grewal Accountancy Class 11 Solution Chapter 3 Accounting Standards and IFRS

About this chapter: Accounting Standards and International Financial Reporting Standards (IFRS) define the principles based on which accounting is being done globally by all companies. It is important for the students to understand about these accounting standards and IFRS which are sometimes generally referred to as International accounting standards. These standards provide the basic framework and accounting policies in principles which are used by all organisations and are also being taught in various schools and professional institutes. In order to comply with government revolutions all organisations should ensure that their accounting is in compliance to the accounting standards issued in various countries. In this chapter basic understanding about these standards have been provided to the students. Please go through the chapter carefully so that you are able to understand basic fundamentals based on which you have to do accounting. This chapter also has various theoretical questions which will help those students to further strengthen concepts. We have provided answers to all the questions given in this chapter below, the solutions have been written by expert accounting teachers for the benefit of students.

Question.1 What is the Matching Concept? Why should a business concern follow this concept?

Answer 1.

Matching Concept or Matching Principle is based on the accounting period concept. According to this concept, the expenses for an accounting period are matched against related revenues, rather than cash received and cash paid to find out the profit earned or loss suffered during that accounting period.

A business concern should follow this concept to find out profit earned or loss suffered during the particular accounting period. It is definitely required to adjust for all outstanding expenses, prepaid expenses, accrued income, unearned income etc.

Question.2 ‘Business units last indefinitely’. Mention and explain the concept on which the statement is based.

Answer 2.

‘Business units last indefinitely’. This statement is based on going concern assumption concept. According to this concept, it is assumed that business shall continue for a foreseeable period and there is no intension to close the business. This implies that it will not be dissolved in the immediate future unless there is a clear evidence of closure.

Question.3 What is Money Measurement Concept? Which one factor can make it difficult to compare the monetary value of one year with the monetary value of another years?

Answer 3.

Money Measurement Concept is the principle in which transaction and events that can be measured in money terms are recorded in the books of account of the enterprise.

The value of money is considered to have static value as the transactions are recorded at the value on the transaction date. This is the one factor which makes it difficult to compare the monetary value of one year with the monetary values of another year.

Question.4 “Only financial transactions are recorded in accounting.” Explain the statement.

Answer 4.

“Only financial transactions are recorded in accounting”. According to money measurement principle only those transactions are recorded as the books of accounts which can be measured in term of money. Money is the common denominator in recording and reporting all transactions. IN other words, non- financial transactions or facts, like the efficiency of the management will never be recorded in the books of accounts.

Question.5 What are the objectives of Ind-AS?

Answer 5.

Below are the objectives behind issuing Ind-AS is to prepare:-

(a) Financial statements of a company on the lines of internationally accepted accounting principles and practices.

(b) Complying with the country’s business environment and laws.

Question.6 ‘Accounting Standards have been evolved to improve the reliability and credibility of Financial Statements. Accounting Standards provide the solution in case of conflicts among various groups.’ In the light of this statement enumerate the objectives of Accounting Standards.

Answer 6.

Accounting standards have been evolved to improve the reliability and credibility of financial statements. Accounting standards provide the solution in case of conflicts among various groups. The accounting standards minimize the divorce accounting policies and practices with the aim to eliminate them to the extent possible. It promotes better understanding of financial statement. It helps in understanding significant accounting policies adopted and applied. It helps in facilitating meaningful comparison of financial statements of two or more entities. Accounting standards enhance reliability of financial statements.

Question.7 Discuss the Accounting Convention based on the premise ‘Do not anticipate profits but provide for all losses.’

Answer 7.

The Prudence or Conservatism Principle is described using the phrase “Do not anticipate a profit, but provide for all possible losses.” In other words, it takes into consideration all prospective losses but not the prospective profit. The application of this concept ensures that the financial statements present a realistic picture of the state of affairs of the enterprise and do not paint a better picture than what it actually is. Conservatism does not record anticipated revenue but provides all anticipated expenses and losses, thus it may overstate liabilities.

Question.8 Explain any three of the following:

(i) Business Entity Concept

(ii) Matching Concept

(iii) Consistency Concept

(iv) Dual Aspect Concept

Answer 8.

(i) Business Entity Concept or Accounting Entity Principle: Business is treated as a separate and distinct entity from its owners. Business transactions therefore are recorded in the books of accounts from the business point of view and not from that of the owners. Owners being regarded as separate and distinct from business. They are considered creditors of the business to the extent of their capital. Their account with the business is credited with the capital introduced and profit earned during the year, etc., and debited by the drawings made. The investment in another company’s share is by a shareholder who is distinct from the business. 

(ii) Matching Concept or Matching Principle: This concept is based on the accounting period concept. According to this concept, the expenses for an accounting period are matched against related revenues, rather than cash received and cash paid to find out the profit earned or loss suffered during that accounting period. A business concern should follow this concept to find out profit earned or loss suffered during the particular accounting period. It is definitely required to adjust for all outstanding expenses, prepaid expenses, accrued income, unearned income etc. According to this concept, the expenses for an accounting period are matched against related revenues, rather than cash received and cash paid. This concept should be followed while preparing financial statements to have a true and fair view of the profitability and financial position of a business firm.

(iii) Consistency Concept or Consistency Assumption: According to this concept accounting practices once selected and adopted, should be applied consistently year after year. This concept helps in better understanding of accounting information and makes it comparable with that or previous years. Consistency eliminates personal bias and helps in achieving result that is comparable. The concept particularly important when alternative accounting practices are equally acceptable. Under this assumption, method once chosen and applied should be applied consistently year after year. But it does not mean that practice once adopted cannot be changed. The accounting practice may be changed if the law or accounting standard requires it or the change will result in more meaningful presentation. If an enterprise to adopt an alternative practice, it must disclose the change and its impact on the profit or loss. 

(iv) Dual Aspect Concept or Duality Principle: According to this concept, every transaction entered into by an enterprise has two aspects, a debit and accredit of equal amount. That is for every debit there is a credit of equal amount in one or more accounts. It is also true vice versa. As a matter of fact the entire system of double entry book keeping is based on this concept.

Question.9 Explain any two of the following concepts:

(i) Accrual Concept

(ii) Business Entity Concept

(iii) Money Measurement Concept

Answer 9.

(i) Accrual Concept: According to the Accrual Assumption, a transaction is recorded in the books of account at the time when it is entered into and not when the settlement take place. Thus, revenue is recognised when it is realised, i.e. when sale is complete or services are rendered; it is immaterial whether cash is received or not. Similarly, expenses are recognised as expenses in the accounting period in which the revenue related to it is recognised, whether paid in cash or not.   

(ii) Business Entity Concept or Accounting Entity Principle: Business is treated as a separate and distinct from its owners. Business transactions, therefore, are recorded in the books of account from the business point of view and not from that of the owners. Owners being regarded as separate and distinct from business. They are considered creditors of the business to the extent of their capital. Their account with the business is credited with the capital introduced and profit earned during the year etc. and debited by the drawings made. The investment in another company’s share is by a shareholder who is distinct from the business. 

(iii) Money Measurement Concept: is the principle in which transaction and events that can be measured in money terms are recorded in the books of account of the enterprise.

The value of money is considered to have static value as the transactions are recorded at the value on the transaction date. This is the one factor which makes it difficult to compare the monetary value of one year with the monetary value of another year.

Question.9 Explain any two of the following concepts:

(i) Money Measurement Concept

(ii) Business Entity Concept

(iii) Matching Concept

Answer 9.

(i) Money Measurement Concept: is the principle in which transaction and events that can be measured in money terms are recorded in the books of account of the enterprise.

The value of money is considered to have static value as the transactions are recorded at the value on the transaction date. This is the one factor which makes it difficult to compare the monetary value of one year with the monetary value of another year.

(ii) Business Entity Concept or Accounting Entity Principle: Business is treated as a separate and distinct from its owners. Business transactions, therefore, are recorded in the books of account from the business point of view and not from that of the owners. Owners being regarded as separate and distinct from business. They are considered creditors of the business to the extent of their capital. Their account with the business is credited with the capital introduced and profit earned during the year etc. and debited by the drawings made. The investment in another company’s share is by a shareholder who is distinct from the business.

(iii) Matching Concept or Matching Principle: This concept is based on the accounting period concept. According to this concept, the expenses for an accounting period are matched against related revenues, rather than cash received and cash paid to find out the profit earned or loss suffered during that accounting period. A business concern should follow this concept to find out profit earned or loss suffered during the particular accounting period. It is definitely required to adjust for all outstanding expenses, prepaid expenses, accrued income, unearned income etc. According to this concept, the expenses for an accounting period are matched against related revenues, rather than cash received and cash paid. This concept should be followed while preparing financial statements to have a true and fair view of the profitability and financial position of a business firm.

Question.10 Explain the following accounting concepts with an example of each:(Old Question)

(i) Going Concern Concept

(ii) Matching Concept

Answer 10.

(i) Going Concern Assumption Concept: According to this concept, it is assumed that business shall continue for a foreseeable period and there is no intension to close the business. This implies that it will not be dissolved in the immediate future unless there is a clear evidence of closure. On the basis of this concept, fixed assets are recorded at their original cost and depreciated at a systematic manner without reference to their market value. For example, a plant purchased is expected to last 5 years. The cost of the plant is spread on a suitable basis over the next 5 years for ascertaining the profit and loss for each year. The total cost of the plant is not treated as an expense in the year of purchases itself.

(ii) Matching Concept or Matching Principle: This concept is based on the accounting period concept. According to this concept, the expenses for an accounting period are matched against related revenues, rather than cash received and cash paid to find out the profit earned or loss suffered during that accounting period. A business concern should follow this concept to find out profit earned or loss suffered during the particular accounting period. It is definitely required to adjust for all outstanding expenses, prepaid expenses, accrued income, unearned income etc. According to this concept, the expenses for an accounting period are matched against related revenues, rather than cash received and cash paid. This concept should be followed while preparing financial statements to have a true and fair view of the profitability and financial position of a business firm. For example, wages paid during the year is Rs. 10,000 and outstanding Rs. 2,000. For charging expenses to the business to find out profit we have to take Rs. 12,000 as total expenses under the head wages for the current year even a part of it has been paid during the year.

Question.11 Explain the Business Entity Concept with example.

Answer 11.

Business Entity Concept or Accounting Entity Principle: Business is treated as a separate and distinct from its owners. Business transactions, therefore, are recorded in the books of account from the business point of view and not from that of the owners. Owners being regarded as separate and distinct from business. They are considered creditors of the business to the extent of their capital. Their account with the business is credited with the capital introduced and profit earned during the year etc. and debited by the drawings made. For Example, when the proprietor introduces further capital in cash then cash account is debited and capital account is credited. Amount in the credit of capital is a liability of the enterprise towards the proprietor. This principle applies to every form of enterprise including proprietorship firms.

Question.12 What are Accounting Standards? Name any two Accounting Standards.

Answer 12.

Accounting Standards are a set of guidelines or generally accepted accounting principles, issued by the accounting body of the country to be followed for preparation and presentation of financial statements. They are accounting rules and procedures relating to measurement, recognition, treatment, presentation and disclosure of accounting transactions in financial statements issued by the Council of the Institute of Chartered Accountants of India.

The Following are two Accounting Standards:

1. International Financial Reporting Standards (IFRS)

2. International Accounting Standards Committee. (IFRC)

Question.13 Define Accounting Standard. Example it’s any two objectives.(Old Question)

Answer 13.

Kohler has defined Accounting Standards as, “a code of conduct imposed on an accountant by custom, law and a professional body.”

The main objectives of Accounting Standards are:

1. Minimise the diverse accounting policies and practices with an aim to eliminate them to the extent possible.

2. Promote better understanding of financial statements.

3. Understand Significant Accounting Policies adopted and applied.

4. Facilitating meaningful comparison of financial statements of two or more entities.

5. Enhancing reliability of financial statements.

Question.14 Define Accounting Standards. Who is responsible for issuing Accounting Standards in India?

Answer 14.

Kohler has defined Accounting Standards as, “A code of conduct imposed on an accountant by custom, law and a professional body.”

The Council of the Institute of Chartered Accountants of India is responsible for issuing Accounting Standards in India.

Question.15 What are the two basic objectives of having Accounting Standards?

Answer 15.

The two basic objectives of having Accounting Standards are:

1.) Minimise the diverse accounting policies and practices with an aim to eliminate them to the extent possible.

2.) Promote better understanding of financial statements.

Question.16 Explain the following briefly with appropriate example:

(i) Revenue Recognition (Realisation) Concept

(ii) Conservation or Prudence Concept

(iii) Money Measurement Concept

Answer 16.

(i) Revenue Recognition (Realisation) Concept: According to this concept revenue is considered to have been realised when a transaction has been entered into and the obligation to receive the amount has been established. It is to be noted that recognising revenue and receipt of an amount are two separate aspects. For Example an organisation sells goods in March, 2016 and receives the amount in April, 2016. Revenue of these sales should be recognised in March, 2016 or when the goods are sold as the legal obligation has been established upon sales in March, 2016.

(ii) Conservation or Prudence Principle is described using the phrase “Do not anticipate a profit, but provide for all possible losses.” In other words, it takes into consideration all prospective losses but not the prospective profits. The application of this concept ensures that the financial statements present a realistic picture of the state of affairs of the enterprise and do not paint a better picture than what it actually is. Conservatism does not record anticipated revenue but provides all anticipated expenses and losses, thus it may overstate liabilities. For example, closing stock is valued at lower of cost or net realisable value.

(iii) Money Measurement Concept: is the principle in which transaction and events that can be measured in money terms are recorded in the books of account of the enterprise.

The value of money is considered to have static value as the transactions are recorded at the value on the transaction date. This is the one factor which makes it difficult to compare the monetary value of one year with the monetary value of another year. For example purchases of two trucks cannot be recorded but the money value paid for this will be recorded in the books of accounts.

Question.17 Explain the following:

(i) Going Concern Concept

(ii) Dual Aspect Concept

Answer 17.

(i) Going Concern Assumption Concept: According to this concept, it is assumed that business shall continue for a foreseeable period and there is no intension to close the business. This implies that it will not be dissolved in the immediate future unless there is a clear evidence of closure. On the basis of this concept, fixed assets are recorded at their original cost and depreciated at a systematic manner without reference to their market value.

(ii) Dual Aspect Concept or Duality Principle: According to this concept, every transaction entered into by an enterprise has two aspects, a debit and accredit of equal amount. That is for every debit there is a credit of equal amount in one or more accounts. It is also true vice versa. As a matter of fact the entire system of double entry book keeping is based on this concept.

Question.18 ‘Accounting Standards have been evolved to improve the reliability and credibility of financial statements. Accounting Standards provide the solution in case of conflicts among various groups.’ In the light of this statement, enumerate the objectives of Accounting Standards.

Answer 18.

The main objectives of Accounting Standards are:

1.) Minimise the diverse accounting policies and practices with an aim to eliminate them to the extent possible.

2.) Promote better understanding of financial statements.

3.) Understand Significant Accounting Policies adopted and applied.

4.) Facilitating meaningful comparison of financial statements of two or more entities.

5.) Enhancing reliability of financial statements.

Question.19. Discuss the principal based on the premise “Do not anticipate profits but provide for all losses”.

Answer 19.

Conservatism Principle is many a time described using the phrase “Do not anticipate a profit, but provide for all possible losses.” Starting differently, it takes into considerations all prospective losses but not the prospective profits. The application of this concept ensures that the financial statements do not paint a better picture than what it actually is.