DK Goel Solutions Class 11 Accountancy Chapter 3 Accounting Principles

Short Questions

Question 1. Define basic accounting terms.

Solution  1: Financial statement of a company is needed by everyone who belongs to the company. It is necessary to structure this financial statement true and fair. Hence, it is important to follow some rules and guidelines. To maintain uniformity in recording transactions and preparing financial statements, accountants should follow Generally Accepted Accounting Principles.

Question 2. Explain the business entity concept with an example.

Solution  2: The concept assumes that business has different and separate entity from its owners. Thus, for the purpose of accounting, business and its owners are to be treated as two separate entities.

Question 3. Why is it necessary for accounts to assume that a business entity will remain a going concern?

Solution  3: It necessary for accounts to assume that a business entity will remain a going concern because if it is not happened there no difference between assets and stock (goods). We assume that assets are not going to be sold in the near future.

Question 4. What is the basic accounting equation?

Solution  4: The basic accounting equation is:-

Assets = Liabilities + Capital

Question 5. Explain the characteristics of Accounting Principles.

Solution  5: The characteristics of Accounting Principles are.

(1) Accounting principles are manmade. These principals are man-made from years of experience and reason.

(2) Accounting principles are flexible in nature. These principles are not static so they have a chance to change with the time according to new policies and needs of the user.

(3) Accounting principles are generally accepted.

Very Short Questions:-

Question 1. Give two characteristics of accounting principles.

Solution  1: The two characteristics of accounting principles are

(i) Man-made

(ii) Flexible

Question 2. What is the business entity concept?

Solution  2: 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. So, Business is treated as an entity separate and distinct from its owners.

Question 3. What is the money measurement concept?

Solution  3: The concept of money measurement states that only those transactions are happenings in an organisation. Which can be expressed in term of money are to be recorded in the books of accounts. Also the records of the transactions are to be kept not in the physical units but in the monetary units.

Question 4. What is going concern concept?

Solution  4: 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.

Question 5. What is the accounting period concept?

Solution  5: Accounting period refers to the span of time at the end of which the financial statement of an enterprise are prepare to know whether it has earned profit or incurred losses during that period and what exactly is the position of its assets and liabilities at the end of that period.

Question 6. What is the cost concept?

Solution  6: According to this concept, an asset is recorded in the books of accounts at its purchasing cost added with all the expenditure included for making the assets useful.

For Example:- A machinery Purchases Rs. 40,000 and installation Expenses for this machinery is Rs. 2,000 So, the total cost of machinery is Rs. 42,000.

Question 7. What is the dual aspect concept?

Solution  7: According to this concept every business transection has two aspects. One aspect is debit and other is credit.

Example: Ram started business with capital Rs. 2,00,000. It increases cash in assets side and capital in liabilities- side by Rs. 2,00,000.

Rs. 2,00,000 (Cash) = Rs. 2,00,000 (Capital).

Question 8. What is matching concept?

Solution  8: According to matching concept every expenses incurred in an accounting period should be matched with revenues during the same period. All the expenses paid during a particular period should be charged to revenue of the period for determining the net profits.

Question 9. How does the matching concept apply to depreciation?

Solution  9: According to matching concept every expenses incurred in an accounting period should be matched with revenues during the same period. Depreciation for the current year is charged against the current year’s revenue. Cost of the asset is not a expense in the year of purchases hence it is separated over its useful life.

Question 10. What is accrual concept?

Solution  10: As per Accrual assumption, all revenue and costs are recorded when they are earned or incurred and it is immaterial whether cash is received or not.

Question 11. What is a convention of full disclosure?

Solution  11: According to this principle there should be complete and understandable recording and reporting on the financial statements of all significant information relating to the financial transaction of the business entity.

Question 12. What is the concept of consistency?

Solution  12: According to this assumption, accounting methods once chooses and adopted, it should be applied consistently year after year. This will ensure a meaningful study of the performance of the business for a number of years. Any accounting practice may be changed if the law or Accounting standard requires so, to make the financial information more meaningful and transparent.

Question 13. What is the convention of prudence or conservatism?

Solution  13: According to conservatism principle, all the possible profit should not be recorded in the books of accounts but all possible losses should be immediately recorded.

Question 14. What is the convention of materiality?

Solution  14: As per this principle only those transactions should be disclosed that have a material effect and are applicable to the users. 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. Whether an item is material or not depends on its nature.

Question 15. Which principle states that the financial statements should disclose all significant information?

Solution  15: Convention of full disclosure principle states that the financial statements should disclose all significant information’s.

Question 16. ‘Closing stock is valued at lower of cost or realisable value’. Which principle of accounting is applied here?

Solution  16: Convention of Prudence or Conservatism, ‘Closing stock is valued at lower of cost or realisable value’.

Question 17. Why should a business follow the consistency concept?

Solution  17: Every business should follow the consistency concept of accounting because financial statements must be comparable from year to year. It is possible only when accounting principles are unchanged and followed the same year after year.

Question 18. State one limitation of historical cost.

Solution  18: In historical cost accounting, fixed assets are recorded and presented at the price at which they purchased and ignored the market value of such assets.

Question 19. Why the entire life of a business is divided into time intervals?

Solution  19: The entire life of business is divided into the time intervals because we can ascertain the revenue expenditure and Capital expenditure and ascertain the amount of profit earned or loss of the business.

Higher Order Thinking Skills (HOTS) Questions

Question 1. What is meant by GAAP?

Solution  1: GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions. GAAP stands for General Accepted Accounting Principles.

Question 2. The proprietor of the business is treated as a creditor to the extent of his capital under which concept?

Solution  2: The proprietor of the business is treated as a creditor to the extent of his capital under business entity concept.

Question 3. A customer of X Ltd. has discounted his business. He used to purchase 30% of the total goods produced by X Ltd. Is it relevant information in your opinion and should be disclosed by X Ltd.

Solution  3: Yes, this information is related to material and should be informed to users of financial statements. So, it must be disclosed as per the convention of full disclosure.

Question 4. X Ltd. gets a contract of Rs.100 crores to build a shopping mall to be completed in 3 years. The management of the company wants to ascertain profit or loss on this contract only when the contract is completed. Is the management justifies?

Solution  4: No, the management is not correct. Only true profits and losses can be recorded in the books of accounts every year. It is divided into particular time period for the ascertainment of profit as per accounting period concept.

Question 5. Under which principle the calibre or quality of the management is not disclosed in the balance sheet.

Solution  5: In the Money measurement concept the calibre or quality of the management is not disclosed in the balance sheet.

Question 6. Which accounting principle states that all anticipated losses should be recorded but all anticipated profits should be ignored?

Solution  6: Conservatism Principle refers that all anticipated losses should be recorded but all anticipated profits should be ignored.

Question 7. According to which concept depreciation is to be charged as per one particular method year after year?

Solution  7: As per consistency concept the depreciation is to be charged as per one particular method year after year.

Question 8. Why the full cost of an asset is not treated as an expense in the year of its purchase?

Solution  8: The full cost of an asset is not treated as an expense in the year of its purchase Because of going concern concept; it is assumed that the business will continue to exist for a long period in the future. Hence, the cost of the asset is spread over its useful life and only the current year’s depreciation is treated as an expense.

Question 9. During the year the company purchased ballpoint pens of Rs.500. These were issued to employees and were still in use at the end of the year. Which accounting concept you would follow in dealing with this item?

Solution  9: Materiality convention will be followed in dealing with this item. As per the concept, items having an insignificant effect or being irrelevant to the users of financial statements need not be disclosed. Hence, it will be treated as an expense and will be debited to the stationery account.

Question 10. A debtor who owes Rs.2 lakhs to the company is rumoured to be declared insolvent. Will you disclose the information in the books?

Solution  10: Yes, as per the Conservatism Principle, all expected losses should be recorded in the books of accounts. So, in this case an account will be created with the name of provision for doubtful debts.

Question 11. Goods withdrawn by the proprietor for his personal use has not been recorded in the books of accounts. Which accounting concept has been violated?

Solution  11: Goods withdrawn by the proprietor for his personal use has not been recorded in the books of accounts here the business entity concept will be violated.

Question 12. In a business provision for doubtful debts is created @5% on debtors every year. Name two accounting principles followed in this process.

Solution  12: There are two accounting principal should be followed:-

1.) Prudence or Conservatism Principle

2.) Consistency concept

Question 13. A firm has stationery stock amounting Rs.400 as at the end of the financial year. Accountant of the firm has written it off to profit and loss account. Is he right in doing so?

Solution  13: Yes, the accountant is correct he has followed the materiality convention concept. Those items which have insignificant effect to the business may not be disclosed or may be written off.

Value Based Question(VBQ) Questions:-

Question 1. Why the closing stock is valued at cost price or realisable value whichever is less?

Solution  1: According to Prudence or Conservatism principle closing stock is valued at lower cost price or realisation value.

Question 2. What is the value involved in adopting the convention of conservatism or prudence?

Solution  2: According to this principle, prospective profit should not be recorded but all prospective losses should immediately be recorded.

The values involved in following this principle are:-

(i) Not to overstate the profit of the enterprise

(ii) Transparency

Question 3. Do you think that the convention of conservatism results in the creation of secret reserves?

Solution  3: Yes, the convention of conservatism will have two effects:

(i) Profit and loss account shows less profit in comparison of the actual profits.

(ii) The balance sheet shows the undervalued of assets side and overvalued the liabilities side.

Question 4. What value is involved in following the concept of a separate entity?

Solution  4: If the concept of a separate entity is missing we are unable to find out the net profits of losses, therefore financial position of the business can’t be identified.

Question 5. Identify the values involved in the assumption of on-going concern.

Solution  5: The values involved in the assumption of on-going concern are:-

(i) By this assumption the cost of the asset is not treated as an expense. The cost of the asset is separated over the useful life of it by applying depreciation.

(ii) By this assumption we can find the difference between capital and revenue expenditure.

Question 6. Why fixed assets are not shown in the books at market value?

Solution  6: Fixed assets are not shown in the books at market value because:-

(i) According to historical concept the value of fixed assets recorded at its original cost.

(ii) In the presence of going concept it is assumed that assets are not to be sold in the forthcoming so market value of assets is irrelevant.

Question 7. Why the entire life of the business enterprise is divided into time intervals?

Solution  7: According to this principle, the life of an enterprise is divided into smaller periods so that its performance can be measured at regular intervals.

Question 8. A company purchased goods for Rs.5,00,000 and sold 80% of such goods during the year. The market value of the remaining goods was Rs.90,000. The company valued the closing stock at cost. Which principle is being violated?

Solution 8: In this situation the principle of Prudence or Conservatism is violated.

Question 9. On 25th March 2017, a fire broke out in the premises of Kamal Ltd. and destroyed a part of its plant and machinery. On account of this, a sharp decline in production for the next six months is expected. The company did not disclose this fact in its annual report for the year ended 31st March 2017. What is your opinion about this omission?

Solution  9: Loss of plant and machinery is material information for every business and it should be disclosed. In this situation the company has violated the principle of full disclosure.

Question 10. R Ltd. purchased 500sq. Meter land for Rs. 1.5 crores to build a factory. At the end of the year, the market value of land was Rs. 1.35 crore. R Ltd. treated Rs. 15 lakh as loss and recorded the land at Rs.1.35 crore. Is it a correct treatment?

Solution  10: No, this treatment is not correct as per cost concept. According to cost concept a fixed asset is recorded in the books at is original cost.

Question 11. Raja Ltd. purchased securities for Rs. 50 lakh. At the end of the year, the market value of such securities was Rs. 40 lakh. While preparing the financial statement, the company valued the securities at cost i.e at Rs.50 lakh. Is it a correct treatment?

Solution  11: No, this treatment is not correct as per Prudence or Conservatism Principle. If the firm is recorded it on its cost then the firm has violated the conservatism principle of accounting. According to this principle current assets are valued at cost price or realisable value whichever is less.

Question 12. A company has been charging depreciation @ 10% on original cost method. It now wants to change the method from the original cost to diminishing balance method, the rate of depreciation being 15% p.a. Can it do so?

Solution  12: Yes, the company can change the method and rate of deprecation too. All the changes should be disclosed according to consistency assumption. The only requirement is that when a change is desirable, it should be fully disclosed in the financial statements along with its effect on income statement and Balance Sheet.

Question 13. Mohan the owner of a business receives an order for the supply of goods worth Rs.2,00,000. He has also received Rs.25,000 against this order. Mohan wants to record it as a sale. Is Mohan correct in doing so?

Solution  13: No, According to matching principle Mohan cannot record this transaction as sale because the goods not have been delivered so the transaction is not completed yet. Under the matching concept, revenue is recognized as earned only when the cost incurred to earn that revenue is also recognized as an expense in that period.

Question 14. Identify the value involved in full disclosure principle.

Solution 14: The value involved in the full disclosure principle are

(i) Transparency

(ii) Honesty

(iii) Reliability