DK Goel Solutions Class 11 Accountancy Chapter 4 Process and Bases of Accounting

Short Questions

Question 1. Define Process of Accounting.

Solution  1: Accounting process of a company starts with the identification of the company’s transaction and then recording, categorizing, and summarizing of a business transaction, which helps in preparation of trial balance and financial statement.

Question 2. What is the cash basis of accounting?

Solution  2: Cash basis of accounting is a system in which transactions are recorded when cash is received or paid. Revenue is recognised on receipt of cash. Expenses are recorded as incurred when they have been paid. The difference between the total incomes and total expenses represents profit or loss of a business for the accounting period. Thus, when Cash Basis of Accounting is followed, outstanding and prepaid expenses and income received in advance or accrued incomes are not considered.

Question 3. What is accrual basis of accounting?

Solution  3: Under accrual basis of accounting income is recorded as income when it is earned or accrued. Similarly, if an expense has been incurred but payment has not been made, it will be recorded as an expense. Accrual Basis of Accounting is based on the concept of realisation and expiration and follows two basic accounting principles, i.e., revenue recognition and matching principle. Under this method net income for the period is the result of matching revenue realised in the period and cost incurred, whether paid or not. The difference between total income and total expense incurred is the profit or loss for the period.

Question 4. In which basis of accounting outstanding expenses are not recorded?

Solution  4: In cash basis of accounting the outstanding expenses are not recorded.

Question 5. Write two advantages of accrual basis of accounting.

Solution  5: The two advantages of accrual basis of accounting are.

(i) Accrual basis of accounting is more scientific as contrast to cash basis of accounting so, the most of the accountants preferred accrual basis of accounting.

(ii) Accrual basis of accounting reflects true profit or loss during the accounting period and, therefore, has wide acceptability.

Question 6. Which basis of accounting is recognized under the Companies Act, 2013.

Solution  6: Accrual basis of accounting is recognized under the Companies Act, 2013.

Question 7. Does the cash basis of accounting violate GAAP? IF, yes, how?

Solution  7: Yes, the cash bases of accounting violate GAAP because it does not follow the rules and guidelines of accrual concept.

Question 8. Explain in details all the steps followed in the process of accounting.

Solution  8: The steps included in the process of accounting are.

1) Identifying the transaction- The first step of accounting is to detect what record in the books of accounts. Only those transactions are recorded in the books of accounts which are in monetary term. Any transaction that can’t be measurable in term of money cannot be recorded in the books. For all the financial transaction it is mandatory to have a voucher or an invoice as a piece of evidence.

2) Recording – A transaction will be recorded in the books of accounts only it is considered as an economic event and can be measured in terms of money. Once the economic events are identified and measured in economic terms they will be recorded in the books of accounts in monetary terms and in chronological order.

3) Posting in Ledger – Once the financial transactions are recorded in journal or subsidiary books, all the financial transactions are classified by grouping the transactions of one nature at one place in a separate room. The ledger is a book of account where all the transactions are recorded according to its nature.

4) Summarising the accounts – It is the final process accounting. In this step we can prepare the trial balance and financial statement. It is concerned with presentation of data and it begins with balance of ledger accounts and the preparation of trial balance with the help of such balances. After the trial balance we can prepare balance sheet.