1st PUC Accountancy Question Bank Chapter 2 Theory Base of Accounting

   

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Karnataka 1st PUC Accountancy Question Bank Chapter 2 Theory Base of Accounting

1st PUC Accountancy Theory Base of Accounting One Mark Questions and Answers

Question 1.
What is the need for theory base accounting?
Answer:
Theory base accountancy makes accounting information meaningful for internal and external uses. Such theory make information is reliable and comparable.

Question 2.
What is accounting concepts?
Answer:
Accounting concepts means assumptions upon which accounting is based and recorded.

Question 3.
What is accounting conventions?
Answer:
Accounting conventions refers to customs, traditions, usages or practices followed by accountants as guide for preparation of financial statements.

Question 4.
What is revenue said to be recognized?
Answer:
“Revenue is said to be recognised from sale of goods, or services only when revenue is actually realised”

Question 5.
Expand GAAP.
Answer:
Generally Accepted Accounting Principles: GAAP.

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Question 6.
What is accrual concept of accounting?
Answer:
This concept distinguish between cash received and receivable, cash paid and payable on various income or expenees of business.

Question 7.
What do you mean by double entry system of Book Keeping?
Answer:
It is a method of book keeping. Double entry system means “The method of recording of two fold aspects of a transactions.

Question 8.
What is single entry system of book-keeping?
Answer:
It is a method of Book-keeping where both the aspects are not recorded, and for a few transactions none of the aspects is recorded.

Question 9.
Write any two Accounting standards, accepted under IAS.
Answer:
As 1. Disclosure of Accounting Policies As 2. Valuation of Inventories.

Question 10.
What is cost concept?
Answer:
An assets acquired by a concern is recorded in the books of accounts at cost called cost concept.

Question 11.
Write the accounting equation.
Answer:
Accounting equation is Assets = Liabilities + Capitals.

Question 12.
Find out the value of Liability, if capital is 50,000 and Assets is 70,000.
Answer:
Liability = Assets – Capital ⇒ Liability = 70,000 – 50,000
Liability = 20,000.

Question 13.
Find out capital, if liability is 70000, and Assets is 200000.
Answer:
Capital = Assets -Liability ⇒ Capital = 2,00,000 – 70,000
Capital = 1,30,000.

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Question 14.
Find out Assets, if capital is 60000 and Liability is 90000.
Answer:
Assets = Capital + Liability ⇒ Assets = 60,000 + 9,0,000
Assets = 1,50,000.

Question 15.
What is Accounting cycles?
Answer:
It refers to the flow of accounting data, in the course of accounting during the period of accounting.

Question 16.
Write any two disadvantages of double entry system.
Answer:
The disadvantages of double entry system are :

  1. It is a costly
  2. It requires special knowledge and skills to maintain the accounts.

Question 17.
Write any two features of double entry system.
Answer:
The two features of double entry system are :

  1. It maintain complete record of all transactions.
  2. It is a costly system and requires a specialised skills to maintain.

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Question 18.
State the two systems of book-keeping.
Answer:
The two systems of book-keeping are :

  1. Single entry system of book-keeping.
  2. Double.entry system of book-keeping.

Question 19.
Write the meaning of an account.
Answer:
An account refers to statement of business transactions relating to person, income, expenses related to a particular period.

Question 20.
Mention any one merit of single entry system of accounting.
Answer:
It is suitable for small business to recording business transaction is more helpful.

Question 21.
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 firms, accountants cannot take this into account while preparing book of accounts because of concept ____________.
Answer:
(i) The conservatism concept.
(ii) The business entity concept.
(iii) The dual aspect concept.
(iv) The consistency concept
(v) Conservatism concept
(vi) The revenue recognition concept
(vii) The money measurement concept.

1st PUC Accountancy Theory Base of Accounting Two Marks Questions and Answers

Question 1.
Why is necessary for accountancy to assume that business will remain a going concern?
Answer:
According to this the assumption is made that “Every business is carried on with a view to ’ continue it for an indefinite period of time in future and not to liquidate the affairs.

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Question 2.
Write any four concepts of accounting.
Answer:

  1. Money measurement concepts
  2. Dual concepts
  3. Business entity concept
  4. Continuity concept.

Question 3.
Mention any four accounting conventions.
Answer:

  1. Convention of materiality
  2. Convention of conservatism
  3. Convention of consistency
  4. Full disclosure.

Question 4.
What is money measurement concept?
Answer:
In accounting, a record is made only of those transactions which can be expressed in terms of money called money measurement concept.

Question 5.
Write any two assumptions of double entry system.
Answer:
The assumptions of double entry system of book keeping are :

  1. Every transactions affects the financial position in two ways.
  2. The effect of change is in opposite directions.
  3. The benefit measured in terms of money.

Question 6.
Write any two advantages of double entry system.
Answer:
The advantages of double entry systems are :

  1. It maintains complete record of all transactions.
  2. The correctness of records can be verified easily.
  3. It helps to ascertain correct profit and loss of the business.

Question 7.
Why it is necessary for accountants to assume that business entity will remain a going concern?
Answer:
Going Concern Concept assumes that the business entity will continue its operation for an indefinite period of time. It is necessary to assume so, as it helps to bifurcate revenue expenditure (i.e. expenditure related to current year), and capital expenditure (i.e. expenditure whose benefits accrue over a period of time).

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Question 8.
When should revenue be recognized? Are there exceptions to the general rule?
Answer:
Revenue should be recognized when sales take place either in cash or credit and /or right to receive income from any source is established. Revenue is not recognized, in case, if the income or payment is received in advance or the. payment is actually received from the debtors. In a nutshell, revenue will be recognized when the right to receive income is established.
The exceptions to this rule are given below.

  • Hire purchase: When goods are sold on hire-purchase system, the amount received in installments is treated as revenue.
  • Long term construction contract: The long term projects like construction of dams, highways, etc. have long gestation period. Income is recognized on proportionate basis of work certified and not on the completion of contract.

Question 9.
What is the basic accounting equation?
Answer:
The basic accounting equation is Assets = Liabilities + Capital
It means that, the monetary value of all assets of a firm is equal to the total claims, viz. owners and outsiders.

Question 10.
The realization 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. This 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:
According to the realization concept. Revenue is recognized when an obligation to receive the amount arises. When the goods are invoiced, it is treated as the transfer of ownership of goods from the seller to the buyer and hence the revenue is recognized.

Question 11.
What is the need for theory base accounting?
Answer:
Theory base accountancy makes accounting information meaningful for internal and external uses. Such theory make information is reliable and comparable.

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Question 12.
What is accounting concepts?
Answer:
Accounting concepts means assumptions upon which accounting is based and recorded.

Question 13.
What is accounting conventions?
Answer:
Accounting conventions refers to customs, traditions, usages or practices followed by accountants as guide for preparation of financial statements.

Question 14.
Why is necessary for accountancy to assume that business will remain a going concern?
Answer:
According to this the assumption is made that “Every business is carried on with a view to continue it for an indefinite period of time in future and not to liquidate the affairs.

Question 15.
What is revenue said to be recognized? Are there exceptions to the general rule?
Answer:
“Revenue is said to be recognised from sale of goods, or services only when revenue is actually realsied”

Question 16.
Expand GAAP.
Answer:
Generally Accepted Accounting Principles.

Question 17.
Write any four concepts of accounting.
Answer:

  1. Money measurement concepts
  2. Dual concepts
  3. Business entity concept
  4. Continuity concept.

Question 18.
Mention any four accounting conventions.
Answer:

  1. Convention of materiality
  2. Convention of conservatism
  3. Convention of consistancy
  4. Full disclosure.

Question 19.
What is accrual concept of accounting?
Answer:
This concept distinguish between cash received and receivable, cash paid and payable on various income or expenees of business.

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Question 20.
What do you mean by double entry system of Book Keeping?
Answer:
It is a method of book keeping. Double entry system means “The method of recording of two fold aspects of a transactions.

Question 21.
What is single entry system of book-keeping?
Answer:
It is a method of Book-keeping where both the aspects are not recorded, and for a few transactions none of the aspects is recorded.

Question 22.
Write any two Accounting standards, accepted under IAS.
Answer:
As 1. Disclosure of Accounting Policies
As 2. Valuation of Inventories.

Question 13.
What is money measurement concept?
Answer:
In accounting, a record is made only of those transactions which can be expressed in terms of money called money measurement concept.

Question 24.
What is cost concept?
Answer:
An assets acquired by a concern is recorded in the books of accounts at cost called cost concept.

Question 25.
Write the accounting equation.
Answer:
Accounting equation is: Assets = Liabilities + Capital.

Question 16.
Find out the value of Liability, if capital is 50,000 and Assets is 70,000.
Answer:
Liability = Assets – Capital
Liability = 70,000 – 50,000 Liability = 20,000.

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Question 17.
Find out capital, if liability is 70000, and Assets is 200000.
Answer:
Capital = Assets – Liability
capital = 2,00,000 – 70,000
capital = 1,30,000.

Question 18.
Find out Assets, if capital is 60000 and Liability is 90000.
Answer:
Assets = Capital + Liability
Assets = 60,000 + 90,000
Assets = 1,50,000.

Question 19.
What is Accounting cycles?
Answer:
It refers to the flow of accounting data, in the course of accounting during the period of accounting.

Question 20.
Write any two assumptions of double entry system.
Answer:
The assumptions of double entry system of book keeping are :

  1. Every transactions affects the financial position in two ways.
  2. The effect of change is in opposite directions.
  3. The benifit measured in terms of money.

Question 21.
Write any two advantages of double entry system.
Answer:
The advantages of double entry systems are :

  1. It maintains complete record of all transactions.
  2. The correctness of records can be verified easily.
  3. It helps to ascertain correct profit and loss of the business.

Question 22.
Write any two disadvantages of double entry system.
Answer:
The disadvantages of double entry system are :

  1.  It is a costly system
  2. It requires special knowledge and skills to maintain the accounts.

Question 23.
Write any two features of double entry system.
Answer:
The two features of double entry system are :

  1. It maintain complete record of all transactions.
  2. It is a costly system and requires a specialised skills to maintain.

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Question 24.
State the two systems of book-keeping.
Answer:
The two systems of book-keeping are :

  1. Single entry system of book-keeping.
  2. Double entry system of book-keeping.

Question 25.
Write the meaning of an account.
Answer:
An account refers to statement of business transactions relating to person, income, expenses related to a particular period.

1st PUC Accountancy Theory Base of Accounting One Mark Questions and Answers

Question 1.
Explain the different accounting concepts.
Answer:
Accounting concepts are basic assumptions and conditions on which the accounting is based, the different concept of accounting are:

(1) Business entity concept: According to this “the business is treated as a separate and distinct entity from the owner, who invests money or money’s worth”. If there is any branch or unit, is also treated as a distinct entity.

(2) Going concern concept: According to this the assumption is made that “Every business is carried on with a view to contiune it for an indefinite period of time in future and not to liquidate the affairs.

(3) Money measurement concept: According to this “the accounting entries made in the books are only of those transactions which can be measured and recorded in terms of money”.

(4) Cost concept: According to this “All the fixed assets which are acquired by a concern are recorded in the books of accounts at cost price”.

(5) Dual-aspect concept: According to this “Every business transactions has a two-fold- aspects (receiving and giving benifit) of same value”.

(6) Accounting period concept: As per the going concern concept every business is intended to be continued indefinitely for a long period in future. In that case the trading result cant be ascertained in the life time. For this “The convinient period of time is selected by dividing the estimated period of life of the business for ascertaining the net result of business during a given period as well as financial position of the business as on that date”.

(7) Realisation concept: According to the “revenue is said to be recognised from sale of goods, or services only when revenue is actually realised.

(8) Matching Concept: Earning prof it is the object of ever}’ business enterprise. It has been the duty of an accountant to calculate exact accurate prof it. The result of there efforts was the introduction of the principle of matching cost and Revenue. According to this principle income can be as curtained by matching revenue of the business with its costs.

(9) Accrual Concept: Accrual means recognition of revenue and costs as they are earned or incurred and not as money is received or paid. The accrual concept relates to measurement of income. Identifying assets is liabilities example: Recording salary payable to staff commission receivable etc.

Question 2.
What is matching concept?
Answer:
This concept mainly based on accounting period concept, according to this “The trading result of a business is calculated by matching the total revenues earned during the year with total amount of expenses incurred in the same year”. The difference between the two represents profit or loss.

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Question 3.
Explain the different accounting conventions.
Answer:
Conventions are customs or traditions which are followed to maintain accounts and presentation of financial statements. The different accounting conventions are :

  • Convention of conservatism: According to this “a safe policy is adopted in preparing the financial statements of a concern. Anticipate profits may be ignored not anticipated loss while financial statements are prepared.
  • Convention of consistancy: According to this the accounting rules and practices should be continuously followed and applied in accounting”. Rules and practices once adopted should not be changed from year to year.
  • Convention of full disclosure: According to this “all the important information should be fully disclosed in the financial statements of a concern”.
  • Convention of materiality: According to this only the significant information which is material in nature, is disclosed in the financial statements.

Question 4.
Write a note on Generally Accepted Accounting Principles. (GAAP).
Answer:
Accounting is the systematic body of knowledge having cache and effect relationship. The subject has certain established concepts, conventions, standard language and terminology to enable the interested parties in the subject to understand it in the same sense as the accountant wants to communicate. There rules are usually called Generally Accepted Principles (GAAP). Accounting assumption rule of recording and reporting business transactions are also known by terms like concepts, principles, conventions, doctrines, axioms and postulates.

Question 5.
Write the difference between accounting and accountancy.
Answer:

Accounting Accountancy
It is a process or activity It is a profession or practice
It consist of principles, concepts, conventions and accounting standard It involves application of accounting principles and conventions to practical problems
Accounting is a clerk job It required public relations.
Without accountancy, accounting has no results or utility  Without accounting, accountancy has no conceptual foundation.
It is less scope compare to accountancy It has wider scope than accounting.

Question 6.
Write the needs or importance of accounting.
Answer:
Accounting needs or importance are as follows-

  • Book-keeping creates financial records in analytical and appropriate manner and also give reference in future.
  • Accounting gives evidence in the eyes of law, it is accepted as evidence.
  • Accounting provides relevant information to the management and helps in decision making.
  • Accounting system develops reporting system, it helps to control the organisation.
  • Accounting prevent fraud and errors, and also reduce the misappropriation of funds in business.
  • As per legal requirement, some of the business should keep accounts compulsorily. It is statutory requirement.

Question 7.
Write a note on basis of accounting.
Answer:
The two basis of accounting are.
(a) Cash Basis of Accounting: It is a simple form of accounting and a payment is received for the sale of goods or services, a goods purchase and payment is recorded on same date. The payment or receipt recorded date wise and not post poring called cash basis accounting under this system accrual transactions are not considered.

(b) Accrual Basis of Accounting: Accrual basis of accounting matches revenue to the time period in which they are earned and matinees expenses to the time period in which they are incurred. It provides more information about business example: Commissioning on sales payable. Interest on fixed deposit receivable etc are recorded for the current period.

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Question 8.
Mention the differences between cash basis accounting and accrual basis accounting.
Answer:

Cash basis  Accrual basis
Receivables are recessed on the date of receipt and not on the period which it belongs. Receivables are recessed when they are earned and not on the day of received.
Expenses are recorded on the date of payment and not on the period which it belongs. Expenses payables are recorded for the period which it belongs and not on the date of payment.
No receivables and payables and recorded. Receivables by payables both are recorded.
Financial statements match only actual receipts and payments. Financial statements match revenues to the expenses in cured in earning them and more accurately reflects the result and operations.
It reflects net cash profit for the year Accrual basis. It reflects correct cash and for cash profit.

Question 9.
What do you mean by Accounting Standard? List out Indian Accounting Standard.
Answer:
According to Ghosh ‘Accounting standard are the policy documents issued by the recognised expert accountancy body relating to various aspects of measurements, treatment and disclosure of accounting transactions and events.’
The following are mandatory Accounting standards (AS) issued by institute of chartered accountants of India (ICAI).

AS 1 Disclosure of Accounting Policies.
AS 2 Valuation of Inventories.
AS 3 Cash Flow Statement
AS 4 Contingencies and events occuring after the balance sheet
AS 5 Net profit or loss for the period. Prior period items and changes in accounting policies AS 6 Depreciation Accounting.
AS 7 Constriction contracts (revised 2002) ‘
AS 8 Presently in in As 26 AS 9 Revenue Recognitions
AS 10 Accounting for Fixed Assets
AS 11 The effects of changes in foreign exchange rates (Revised 2003)
AS 12 Accounting for Government grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamation
AS 15 Employes Benefits (revised 2005)
AS 16 Borrowing costs
AS 17 Segment Report
AS 18 Related party disclosure
AS 19 Leases
AS 20 Earning per share
AS 21 Consolidated financial statements.
AS 22 Accounting for Taxes and Incomes
AS 23 Accounting for investments in associates in Consolidated Financial statement.
AS 24 Discontinuing operation AS 25 Interim Financial Reporting
AS 26 Intangible Assets .
AS 27 Financial reporting of interest in joint venture.
AS 28 Impairment of Assets
AS 29 Provisions, contingent liabilities and contingent assets.
AS30 Financial Instruments: Recognition and Measurement.
AS31 Financial Instruments: Presentation
AS32 Financial Instruments: Disclosure.

1st PUC Accountancy Theory Base of Accounting Six Marks Questions and Answers

ESSAY TYPE / LONG ANSWERS

Question 1.
The accounting concepts and accounting standards are generally referred to as the essence of financial accounting. Comment.
Answer:
Financial accounting is concerned with the preparation of the financial statements and provides financial information to various accounting users. It is performed according to the basic accounting concepts like Business Entity, Money Measurements, consistency, Conservation, etc. These concepts allow various alternatives to treat the same transaction.

For example, there are a number of methods available for calculating stock and depreciation, which can be followed by various firms? This leads to wrong interpretation of financial results by external users due to the problem of inconsistency and incomparability of financial results among different business entities. In order to mitigate inconsistency and incomparability and to bring uniformity in preparation of the financial statements, accounting standards are being issued in India by the Institute of Chartered Accountant of India. Accounting standards help in removing ambiguities and inconsistencies.

Hence, accounting standards and accounting concepts are referred as the essence of financial accounting.

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Question 2.
Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.
Answer:
Financial Statements are drawn to provide information about growth or decline of business activities over a period of time or comparison of the results, i.e. intra-firm (comparison within the same organization) or inter-firm comparisons (comparison between different firms). Comparisons can be performed only when the accounting policies are uniform and consistent.

According to the Consistency Principle, accounting practices once selected should be continued over a period of time (i.e. years after years) and should not be changed very frequently. These help in a better understanding of the financial statements and thus make comparisons easy.

Although consistency does not prevent change in the accounting policies, but if change in the policies is essential for better presentation and better understanding of the financial results, then the firm must undertake change in its accounting policies and must fully disclose all the relevant information, reasons and effects of those changes in the financial statements.

Question 3.
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 of 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 its revenues earned in the same accounting period for ascertaining profit or loss.

For example, insurance premium paid for a year is ₹ 1200 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, ₹ 1200 – ₹ 900 = ₹ 300

Thus, according to the matching concept, the expense of ₹ 900 will be taken into account ₹ and not ₹ 1200 for determining profit, as the.benefit of only ₹ 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 under casting of the profit or loss, which may not reveal the truth, efficiency of the business and its activities in the concerned accounting period,

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 ₹ 10,000 each are purchased and this event js recorded in the books with a total amount of ₹ 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 ₹ 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 arid liabilities of the business.

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