NCERT | CLASS 11 Theory Base of Accounting | IMPORTANT QUESTIONS

Question 1: What is matching concept? Why should a business concern follow this concept? Discuss?

ANSWER:

Matching Concept states that all expenses incurred during the year, whether paid or not and all revenues earned during the year, whether received or not, should be taken into account while determining the profit of that year. In other words, expenses incurred in a period should be set off against revenues earned in the same accounting period for ascertaining profit or loss. For example, insurance premium paid for a year is Rs1200 on July 01 and if accounts are closed on March 31, every year, then the insurance premium of the current year will be ascertained for nine months (i.e. from July to March) and will be calculated as,

Rs 1200 − Rs 900 = Rs 300

Thus, according to the matching concept, the expense of Rs 900 will be taken into account and not Rs 1200 for determining profit, as the benefit of only Rs 900 is availed in the current accounting period.

The business entities follow this concept mainly to ascertain the true profit or loss during an accounting period. It is possible that in the same accounting period, the business may either pay or receive payments that may or may not belong to the same accounting period. This leads to either overcasting or undercasting of the profit or loss, which may not reveal the true efficiency of the business and its activities in the concerned accounting period. Similarly, there may be various expenditures like purchase of machinery, buildings, etc. These expenditures are capital in nature and their benefits can be availed over a period of time. In such cases, only the depreciation of such assets is treated as an expense and should be taken into account for calculating profit or loss of the concerned year. Thus, it is very necessary for any business entity to follow the matching concept.

Question 2: What is the money measurement concept? Which one factor can make it difficult to compare the monetary values of one year with the monetary values of another year?

Answer:

Money Measurement Concept states that only those transactions and events are recorded in accounting that is capable of being expressed in terms of money. An event even though may be very important for business, will not be recorded in the books of accounts unless its effect can be measured in terms of money. For Example, a business has 5 machines then this thing cannot be added up unless expressed in terms of money. In order to record this item, we must have to express it in monetary terms say Rs. 1,00,000. Thus, the money measurement concept enables consistency in maintaining accounting records.
But on the other hand, the adherence to the money measurement concept makes it difficult to compare the monetary values of one period with that of another. It is because of the fact that the money measurement concept ignores the changes in the purchasing power of the money, i.e. only the nominal value of money is concerned with and not the real value. What Rs 1 could buy 10 years back cannot buy today; hence, the nominal value of money makes comparison difficult. In fact, the real value of money would be a more appropriate measure as it considers the price level (inflation), which depicts the changes in profits, expenses, incomes, assets, and liabilities of the business.

Question 3: International Financial Reporting Standards (IFRS):-

Answer:

Globalization has unified different economies of the world. Enterprises are carrying on business worldwide. As accounting is the language of business, different enterprises around the world should not be speaking different languages in their financial statements. It will be very difficult to understand and compare these statements.
International Financial Reporting Standards (IFRS) are issued by the International Accounting Standard Board (IASB). IASB replaced International Accounting. Standard Committee (LASC) in 2001.LASC was formed in 1973 to develop accounting standards that have global acceptance and make different accounting statements of different countries similar and comparable.
Assumptions in IFRS:-
The underlying assumptions in IFRS are as follows:

1. Measuring Unit Assumption:- Current purchasing power is the measuring unit which means that assets in the balance sheet are shown at current or fair value and not at historical cost.
2. Constant Purchasing Power Assumption:- It means that the value of capital is to be adjusted for inflation at the end of the financial year.
3. Accrual Assumption:- Transactions are recorded as and when they occur and the date of settlement is irrelevant.
4. Going Concern Assumption:- It is assumed that the life of the business is infinite.

Question 4 : What is the money measurement concept? Which one factor can make it difficult to compare the monetary values of one year with the monetary values of another year?

ANSWER:

Money Measurement Concept states that only those events that can be expressed in monetary terms are recorded in the books of accounts. For example, 12 television sets of Rs10,000 each are purchased and this event is recorded in the books with a total amount of Rs 1,20,000. Money acts a common denomination for all the transactions and helps in expressing different measurement units into a common unit, for example rupees. Thus, money measurement concept enables consistency in maintaining accounting records. But on the other hand, the adherence to the money measurement concept makes it difficult to compare the monetary values of one period with that of another. It is because of the fact that the money measurement concept ignores the changes in the purchasing power of the money, i.e. only the nominal value of money is concerned with and not the real value. What Rs 1 could buy 10 years back cannot buy today; hence, the nominal value of money makes comparison difficult. In fact, the real value of money would be a more appropriate measure as it considers the price level (inflation), which depicts the changes in profits, expenses, incomes, assets and liabilities of the business.

Question 5 : When should revenue be recognised? Are there exceptions to the general rule?

Answer

Revenue is recognised only when it is realised i.e., when a legal right to receive it arises. Thus credit sales are treated as revenue on the day sales are made and not when cash is received from the buyers. Similarly, rent for the month of March even if received in April month will be treated as revenue of the financial year ending 31st March.
There are two exceptions to this rule:
→ In case of sales on installment basis, only the amount collected in installments is treated as revenue.
→ In case of long-term construction contracts, proportionate amount of revenue, based on part of the contracted completed by the end of the financial year is treated as realised.

Question 6 : ‘Only financial transactions are recorded in accounting’. Explain the statement.

Answer :

According to this principle, only those transactions and events are recorded in accounting which are capable of being expressed in terms of money are recorded in the books of accounts, such as the sale of goods or payment of expenses or receipt of income, etc.
An event may be important for the business (such as dispute among the owners or managers, the appointment of a manager, etc.), but it will not be recorded in the books of accounts simply because it can not be converted or recorded in terms of money. For instance, strike by workers may adversely affect the business but it cannot be recorded in the books of accounts unless its effect can be measured in terms of money with a fair degree of accuracy.
Another aspect of this principle is that the transactions that can be expressed in terms of money have to be converted in terms of money before being recorded.It should be remembered that money is the only measurement which enables various things of diverse nature to be added up together and dealt with. The money measurement assumption is not free from limitations. Due to the changes in price, the value of money does not remain the same over a period of time. The value of rupee today on account of rising in price is much less than what it was, say ten years back. As the change in the value of money is not reflected in the book of accounts, the accounting data does not reflect the true and fair view of the affairs of an enterprise. As, such, to make accounting records relevant, simple, understandable and homogeneous, they are expressed in a common unit of measurement,i.e., money.

Question 7 : What are the advantages of Book‐Keeping ?

Answer :

1.  To the Management of a Business 
(a) In evaluating various alternative proposals so as to take maximum benefit from the best alternative.

(b) In deciding matters such as elimination of an unprofitable activity, department or product, replacement of fixed assets, expansion of business etc.

(c) Planning the various activities and planning of revenues and expenses and arranging for finance in case of need.

(d) Comparing various year’s account to know the progress or deterioration of the business and take actions to improve the business.

(e) Accounting information helps in providing evidence in a court of law in case of legal action taken by others.

(f) Accounting information helps in assessing the income tax, sales tax and property tax of the business.

(g) Accounting information constitutes one of the basis for borrowing loans from external source.

(h) It helps to detect errors and frauds that have taken place in the business.

2.  To the Investors:
(a) Types of property owned by the business.

(b) Sources and amount of earnings made or losses incurred by the business.

(c) Particulars such as stock position, debts owed, debts due etc.

(d) Whether rate of earnings is high or low.

3.  To the Employees:
It provides information to employees so as to claim fair wages, bonus, and other welfare facilities.

4.  To the Government:
(a) Accounting information helps Government to extend subsidies and incentives and other exemptions to certain types of business.

(b) The industrial progress can be known by the Government of the country. It can formulate industrial policies for further growth and development of industries.

(c) It enables the Government to assess the income from the industrial sector.

(d) It helps in amending various laws or enacting laws governing the functioning of business enterprises.

(e) It helps the Government in deciding price control, wage fixation, excise duties, sales tax etc.

5.  To the Consumers: 
Customers are not overcharged as selling price is fixed on the total expenses incurred by adding a reasonable rate of profit.

6. To the Prospective Investors: 
It helps the prospective investors in choosing the right type of investment depending upon the profit earning capacity of the business enterprises and the profit earned during past few years.

7.  To the Creditors and Suppliers: 
Creditors can decide the solvency position of the business through the accounting information. Similarly, suppliers can also decide whether goods can be sold in future on credit basis.

Question 8 : Discuss the concept-based on the premise ‘do not anticipate profits but provide for all losses’.

Answer :

According to the Conservatism Principle, profits should not be anticipated; however, all losses should be accounted (irrespective whether they occurred or not). It states that profits should not be recorded until they get recognised; however, all possible losses even though they may happen rarely, should be provided. For example, stock is valued at cost or market price, whichever is lower. If the market price is lower than the cost price, loss should be accounted; whereas, if the former is more than the latter, then this profit should not be recorded until unless the stock is sold. There are numerous provisions that are maintained based on the conservatism principle like, provision for discount to debtors, provision for doubtful bad debts, etc. This principle is based on the common sense and depicts pessimism. This also helps the business to deal uncertainty and unforeseen conditions.

Question 9 : Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.

Answer :

It is important to adopt a consistent basis for the preparation of financial statements because it helps in comparability of financial statements. For Example: if a firm choose straight line method for showing depreciation but in the next accounting period switched over to written down method then the results of this year cannot be compared to that of the previous years. However, it does not mean that firm cannot changes its accounting policies. A better method, if available which will lead to better presentation and better understanding of the financial results, the firm may adopt but it must be stated clearly by way of footnotes to enable the users of the financial statements to be aware of the changes.

Question 10 : What is Book-Keeping?

Answer :

Book‐Keeping is a systematic manner of recording transactions related to business in the books of accounts. In Book‐Keeping, transactions are recorded in the order of the dates. An Accountant is a person who records the transactions in the books of the business and is expected to show the financial results of a business for every financial year. A financial year in India is followed from 1st  April to 31st  March.

According to J. R. Batliboi :

“Book‐Keeping is an art of recording business dealings in a set of books.” 

According to R.N  Carter:

“Book‐Keeping  is  an  art  of  recording  in  the  books  of  accounts,  all  those  business  transactions  that  result in transfer of money’s worth”