DK Goel Solutions Class 11 Accountancy Chapter 2 Basic Accounting Terms

Short Question

Question 1. Define basic accounting terms.

Solution  1: Basic accounting terms are those terms of accounting which are used regularly in recording of accounting transaction.

Question 2. Give three examples of revenues.

Solution  2: The three examples of revenues are:-

(i) Money received from Sale of Goods or service.

(ii) Money received from Sale of fixed assets.

(iii) Commission, interest, rent, etc. Received by the business.

Question 3. Distinguish between profit and gain.

Solution  3 : Profit is the surplus of revenues over expenses during an accounting period. Profit is regular in nature which is regularly recoded in the books of accounts. It is regularly generated when we sale of goods whereas Gain is a profit of irregular or non-recurrent nature such as, profit on sale of fixed asset or investment and winning a lottery prize etc.

Question 4. Distinguish between fixed assets and current assets.

Solution  4: Fixed assets are those assets which are held for continued use in the business and are not meant for resale whereas 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.

Question 5. Distinguish between revenue expenditure and capital expenditure

Solution  5: 1) Revenue Expenditure: It is the amount spent to purchase goods and services that are used during an accounting period is called revenue expenditure. For Example: Rent, interest, etc.

                   2) Capital Expenditure: If benefit of expenditure is received for more than one year, it is called capital expenditure. Example: Purchase of Machinery.

Question 6. Distinguish between expense and expenditure.

Solution  6: Expenses:- Costs incurred by a business for earning revenue are known as expenses. For example: Rent, Wages, Salaries, Interest etc.

                   Expenditure:- Spending money or incurring a liability for acquiring assets, goods or services is called expenditure. The expenditure is classified as:

1) Revenue Expenditure: It is the amount spent to purchase goods and services that are used during an accounting period is called revenue expenditure. For Example: Rent, interest, etc.

2) Capital Expenditure: If benefit of expenditure is received for more than one year, it is called capital expenditure. Example: Purchase of Machinery.

3) Deferred Revenue Expenditure: There are certain expenditures which are revenue in nature but benefit of which is derived over number of years. For Example: Huge Advertisement Expenditure.

Question 7. Distinguish between expenses and losses.

Solution  7: 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 8. Give two characteristics of a business transaction.

Solution  8: The two characteristics of a business transaction are.

(i) The business transaction or accounting transaction expressed in terms of money.

(ii) The output of the business transaction change in the financial position of the firm.

Very Short Question

Question 1. What is Capital?

Solution  1: 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.

Capital = Assets – External Liabilities

Question 2. What are Drawings?

Solution  2: 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.

Question 3. What are Liabilities?

Solution  3: 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.

Question 4. What are Assets?

Solution  4: 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.

Question 5. What are the Current Assets?

Solution  5: 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.

Question 6. Give two examples of current assets.

Solution  6: The examples of current assets are:-

(i) Cash

(ii) Stock

Question 7. Give two examples of tangible assets.

Solution  7: The examples of tangible assets are:-

(i) Land and building

(ii) Stock

Question 8. Give two examples of intangible assets.

Solution  8: The examples of intangible assets are:-

(i) Goodwill

(ii) Copyright

Question 9. What are fictitious assets?

Solution  9: 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 10. What are the current liabilities?

Solution  10: Current Liabilities are commitment or obligations that are payable within an accounting period a financial year such as Creditors, Bill Payable etc.

Question 11. Give two examples of current liabilities.

Solution  11: The two examples of current liabilities are:-

(i) Bill payable

(ii) Creditors

Question 12. What are the internal liabilities?

Solution  12: According to accounting principles business and owners have separate entity. Capital is treated as creditor of the business so it is liability of a business entity to pay its owners. In other words all amounts which a business has to pay to its owners are internal liabilities. For example: capital and profits.

Question 13. What is the expense?

Solution  13: 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.

Question 14. What are the revenue?

Solution  14: 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.

Question 15. What is income?

Solution  15: Surplus of revenue over its expenses is called income.

Income = Revenue – Expenses.

Question 16. What is a voucher?

Solution  16: Vouchers are the evidence of business transactions. The examples of vouchers are cash memo, invoice, bill, receipt, debit notes, credit notes etc.

Question 17. What is a trade discount?

Solution  17: The purpose of this discount is to persuade the buyer to buy more goods. It is offered at an agreed percentage of list price at the time of selling goods. This discount is not recorded in the accounting books as it is deducted in the invoice/cash memo.

Question 18. What is a cash discount?

Solution  18: The objective of providing cash discount is to encourage the debtors to pay the dues promptly. This discount is recorded in the accounting books.

Question 19. What is meant by purchases?

Solution  19: The term purchased is used only for the goods procured by a business for resale. In case of trading concerns it is purchase of final goods and in manufacturing concern it is purchase of raw materials. Purchases may be cash purchases or credit purchases.

Question 20. What is meant by sales?

Solution  20: Sales are total revenues from goods sold or services provided to customers. Sales may be cash sales or 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.

Question 21. Define merchandise.

Solution  21: Goods for sale are known as Merchandise.

Question 22. Profit is earned on the sale of a fixed asset. What should be the accounting treatment of this profit?

Solution  22: It is a Capital Receipt or Capital revenue; it should be transferred to capital reserve account.

Question 23. Give two examples of revenue expenditure.

Solution  23: The two examples of revenue expenditure are:-

(i) Cost of goods sold

(ii) Salary

Higher-Order Thinking Skills (HOTS) Questions: -

Question 1. Godrej Ltd. imported from Germany one machinery for sale in India and other machinery for production purposes. Will you treat them goods or fixed assets?

Solution 1: Here first machinery will be treated as goods, and secondary machinery will be treated as fixed asset.

Question 2. Mr. Jaspal Singh dealing in electronic goods sold 20 TV sets costing Rs.30,000 each at Rs.40,000 each. Out of this Rs., 5,00,000 were received in cash and the balance is not yet received. State the amount of revenue.

Solution 2: Total Revenue generated = Number of TV Sets × Price Per TV

Total Revenue generated = 20 × Rs. 40,000

Total Revenue generated = Rs. 8,00,000

Here Rs. 5,00,000 treated as cash sale and Rs. 3,00,000 as credit sales. Total Revenue will be Rs. 8,00,000. Both cash sales and credit sales are included in revenue. Revenue is the amount which is received or receivable from sale of goods and services.

Question 3. Mr. Dina Nath who owed us Rs.50,000 became insolvent and paid only 40% of this amount. What is the term used for the amount not received?

Solution  3: The term used for not received amount is Bad debts.

Question 4. Explain a few basic accounting terms.

Solution  4: Few basic accounting terms are.

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.

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.

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.

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.

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.

Value Based Question (VBQ) Questions:-

Question 1. What is the value involved in classifying the assets into current and non-current?

Solution  1: Classification of current assets and non-current asset helps to find out the fair value or liquidity position of the business. Current Assets are those assets which are held for short period and can be converted into cash within one year whereas Non-Current Assets are those assets which are hold for long period and used for normal business operation. For example: Land, Building, Machinery etc.

Question 2. Discuss the value involved in classifying the receipts into capital and revenue?

Solution  2: Classification of capital receipts and revenue receipts is necessary for preparation of final account as revenue receipts are shown on the credit side of trading and profit and loss account whereas capital receipts are shown in the balance sheet. Revenue Receipts are those receipts which are occurred by normal operation of business-like money received by sale of business products whereas Capital Receipts are those receipts which are occurred by other than business operations like money received by sale of fixed assets.

Question 3. Identify the value involved in classifying the expenditure into capital and revenue.

Solution  3: Classification of capital expenditure and revenue expenditure is necessary for preparation of Final account of business firm. As Capital expenditure is written in the balance sheet whereas revenue expenditure is written on the debit side of trading or profit and loss account. It is the amount spent to purchase goods and services that are used during an accounting period is called revenue expenditure. For Example: Rent, interest, etc. whereas If benefit of expenditure is received for more than one year, it is called capital expenditure. Example: Purchase of Machinery.

Question 4. What is the reason that the capital expenditure is shown in the balance sheet?

Solution  4: Amount spent on purchasing of fixed assets is treated as capital expenditure. Capital Expenditure is appearing in the assets side of balance sheet because it beneficial over a long period of time.