RBSE Solutions for Class 11 Accountancy Chapter 2 Theory Base of Accounting

Rajasthan Board RBSE Solutions for Class 11 Accountancy Chapter 2 Theory Base of Accounting Textbook Exercise Questions and Answers.

RBSE Class 11 Accountancy Solutions Chapter 2 Theory Base of Accounting

RBSE Class 11 Accountancy Theory Base of Accounting Textbook Questions and Answers 

Test Your Understanding I

Choose the correct answer.

Question 1. 
During the life-time of an entity accounting produce financial statements in accordance with which basic accounting concept:
(a) Conservation    
(b) Matching
(c) Accounting period 
(d) None of these.
Answer: 
(c) Accounting period 

Question 2. 
When information about two different enterprises have been prepared and presented in a similar manner the information exhibits the characteristic of:
(a) Verifiability    
(b) Relevance
(c) Reliability    
(d) None of these.
Answer: 
(d) None of these.

Question 3. 
A concept that a business enterprise will not be sold or liquidated in the near future is known as:
(a) Going Concern    
(b) Economic Entity
(c) Monetary Unit    
(d) None of these.
Answer: 
(a) Going Concern    

Question 4. 
The primary qualities that make accounting information useful for decision-making are:
(a) Relevance and freedom from bias
(b) Reliability and comparability
(c) Comparability and consistency
(d) None of these.
Answer: 
(b) Reliability and comparability

Test Your Understanding II

Fill in the correct word.

1. Recognition of expenses in the same period as associated revenues is called ............ concept.
2. The accounting concept that refers to the tendency of accountants to resolve uncertainty and doubt in favour of understating assets and revenues and overstating liabilities and expenses is known as    ............
3. Revenue is generally recognised at the point of sale denotes the concept of ............    
4. The ............ concept requires that the same accounting method should be used from one accounting period to the next.
5. The ............ concept requires that accounting transaction should be free from the bias of accountants and others.
Answers: 
1. Matching 
2. Conservatism 
3. Revenue Realisation 
4. Consistency 
5. Objectivity

Short Answer Type Questions
 
Question 1.
Why is it necessary for accountants to assume that business entity will remain a going concern?
Answer: 
It is taken for granted that the business will last for a long time. So, keeping in view this concept, all the transactions are recorded. The business will get benefit from certain expenditure over a long period of time. Therefore, assuming that the business will continue to operate in the future, expenditure so incurred is to be spread over a long period in future. 

It becomes imperative for us to choose an accounting year for this purpose and suitable part of this type of deferred revenue expenditure is to be charged to that accounting period to which benefits accrued. Similarly,The assets are shown at their book value and not at their market value. The current resale value is irrelevant since it is assumed that these assets are not going to be sold but will be used by the continuing business.

Question 2. 
When should revenue be recognised? Are there exceptions to the general rule?
Answer: 
Revenue should be recognised when the sales takes or services are rendered either in cash or on credit basis. It should be recognised for the period for which accounts are being prepared and not on the basis of receipt of cash.

Example: Goods are sold in the month of April payment is realised in the month of May, here revenue will be considered as realised in the month of April. Similarly, some advances have been taken in the month of March and goods are actually sold in April, the revenue will be considered as realised in the month April.

Exceptions to revenue recognition principle:

(1) Likely sales or anticipated revenues: Expected revenue for next accounting year may overstate the current year’s profit and hence such incomes are not considered in current year.

(2) Goods sold on hire purchase basis: Revenue is considered when the instalment is received and not when the goods are actually sold.

(3) Long term construction contract: The payment is made against certified work and not on the basis of amount of contract. Certified work becomes the basis of revenue.

Question 3. 
What is the basic accounting equation?
Answer: 
According to dual aspect concept, every business transaction has a dual effect, i.e., every business transaction affects the financial position of the business in two aspects. Accounting equation is, therefore, another form of dual aspect concept. It is based on ‘Double entry system of bookkeeping’.
Dual aspect concept states that at any point of time the assets of an enterprise must be equal to the total of owner’s equity and outsider’s liabilities (in monetary terms). Hence, the total of the assets will be equal to total of liabilities. 
Thus, Equities = Assets Or
Capital + Outside Liabilities = Assets

Question 4. 
The realisation concept determines when goods sent on credit to customers are to be included in the sales figure for the purpose of computing the profit or loss for the accounting period. Which of the following tends to be used in practice to determine when to include a transaction in the sales figure for the period. When the goods have been:
(a) dispatched 
(b) invoiced 
(c) delivered 
(d) paid for. Give reasons for your answer.
Answer: 
Revenue is considered as realised when the obligation to realize the amount arises on account of sales. When the goods invoiced, the ownership of goods is transferred and revenue is recognised. 

Question 5.
Complete the following work sheet:
(i) If a firm believes that some of its debtors may ‘default’, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the    ............ concept.
(ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the ............ concept.
(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the ............ concept.
(iv) The    ............ concept states that if straight line method of depreciation is used in one year, then it should also be used in the next year.
(v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be increased.
Normal accounting procedure is to ignore this because of the ............
(vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the ............
(vii) The management of a firm is remarkably incompetent, but the firm’s accountants can not take this into account while preparing book of accounts because of ............ concept.
Answer: 
(i) Conservatism (Prudence) 
(ii) Separate Entity Principle 
(iii) Dual Aspect Concept 
(iv) Consistency
(v) Conservation Concept 
(vi) Revenue Recognition and Realisation Principle 
(vii) Money measurement 

Long Answer Type Questions

Question 1.
‘The accounting concepts and accounting standards are generally referred to as the essence of financial accounting’. Comment.    
Answer:
Accounting concepts includes those basic assumptions or conditions upon which the science of counting is based. These concepts are basic to the accounting process without which no enterprise can prepare its financial statements. The following are important accounting concepts:
1. Business Entity Concept    
2. Dual Aspect Concept
3. Going Concern Concept    
4. Accounting Period Concept
5. Money Measurement Concept    
6. Revenue Match Concept
7. Cost Concept    
8. Historical Record Concept
9. Accrual Concept
Whereas, accounting standard is a selected set of accounting policies or guidelines related to the various principles and methods chosen out of several alternatives. The main objective of accounting standards is to harmonise the diverse accounting policies and practices at present use in India.

Question 2.
Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.
Answer:
Basic Accounting concepts plays an important role for the preparation of financial statements. The conclusions are drawn by accounting information which are to be provided by financial statements. These conclusions are drawn only when it allows comparisons over a period of time as well as with working of other enterprises. This comparison is possible only when accounting policies and practices followed by enterprises are uniform and are consistent over the period of time.

Example: When an investor wants to know the financial position of an enterprise incurred year as compared to the previous year, he may compare net profit of current year with previous year. If accounting policies are different for both year then this comparison is not possible or consistent.

Comparison between the financial results of two enterprises would be meaningful only if same kind of accounting methods and policies are adopted in the preparation of financial statements.

Question 3.
Discuss the concept-based on the premise ‘do not anticipate profits but provide for all losses’.
Answer:
The concept of conservatism also called “Prudence Concept”. This concept is based on the premise do not anticipate profit but provide for all losses. This concept provides us guidance how we should record transaction in the books of accounts. The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated. If the profits ascertained are more than actual, it may lead to overstatement of profits and would attract unnecessary expectations of different stakeholders. 
Example: Closing stock is valued at cost or market value whichever is lower.

Question 4. 
What is matching concept? Why should a business concern follow this concept? Discuss.
Answer:
The matching concept emphasises on aspect in which ascertaining amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from revenue earned during that period.

Expenses are recognised not at the time of payment but at the time of service has been used to generate revenue. Example: Expenses such as salaries, rent and insurance are recognised on the basis of period not on the basis when paid.

While ascertaining the profit and loss of an Accounting year, we should not take the cost of all goods produced or purchased dining that period but consider only cost of goods sold. The matching concept, implies that all revenues earned during an accounting year, whether received during that year or not and all costs incurred, whether paid during the year, or not should be taken into Account while ascertaining Profit or Loss.

Question 5.
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: As per this concept, the transactions which are monetary in nature or in money’s worth can be recorded in the books of accounts. Another important aspect of the concept of money measurement is that the records of transaction must be made in monetary units and not in physical units. 

For example: in an organisation, on a particular day, a factory measured 5 acres of land, where office building containing 10 rooms, 30 personal computers, 30 chairs. These things must be expressed in monetary terms. 

Difficulty in comparing the monetary values of one year with the monetary values of another year
It happens due to changes in the market prices of assets. There are two values, one is nominal value which we show in books of accounts and another is real value (market value).

Due to inflation, the market value of assets go down and of liabilities may go up but we don’t relate the value of assets and liabilities with market value. What could a rupee buy 10 years back, cannot buy today. To make comparison meaningful, price level changes are required to incorporate in the value of assets and liabilities which normally happens when the business is sold or reconstituted. Hence comparison of one year’s figure is not appropriate with another year.