Dinesh rajpal accounts classes assignment class xi

Chapter 1
VERY SHORT ANSWER QUESTIONS
(Questions Carrying 1 Mark)
1. What is meant by Accounting?
Ans. Accounting is the art of recording, classifying, summarising and communicating financial
information to users for correct decision making.
2. Give any two objectives of accounting.
Ans. 1. To keep systematic record of business transactions.
2. To ascertain profit earned or loss suffered during a particular period.
3. How is profit or loss of a particular period is ascertained?
Ans. Profit or loss of a particular period is ascertained by preparing a Trading and Profit and
Loss Account.
4. How do we ascertain the financial position of the business?
Ans. By preparing a Balance Sheet.
5. Name the branch of commerce, which keeps a record of monetary transactions in a set of
books.
Ans. Book-keeping.
6. Give one point of distinction between Book-keeping and Accountancy. (KVS2022)
Ans. The main objective of book-keeping is to maintain systematic record of business
transactions whereas the main objective of accounting is to ascertain profit or loss and the
financial position of the business.
7. What is end product of financial accounting? (NCERT)
Ans. End product of accounting are the financial statements (i.e., Profit & Loss Account and
Balance Sheet) and reports which provide information that are useful to a variety of users who
want to know the profitability and financial position of an enterprise.
8. Name any two users of accounting information. (Delhi 2022)
Ans. (i) Owners, (ii) Creditors.
9. Who are the internal users of accounting information? (Delhi 2020)
Ans. Internal users are the persons who are directly involved in managing and operating the
business enterprise such as directors or the partners, managers and officers.
10. Name any two external users of accounting information?
(Delhi 2018) (Chandigarh 2018, 2019)
Ans. Any two of these : potential investors, creditors, lenders, employee unions, customers,
Government etc.
11. State the nature of information required by Investors.
Ans. They want information regarding risks and returns on their investment in the business
enterprise.
12. What type of information is required by long-term lenders?
Ans. They want information about the creditworthiness and the ability of the enterprise to pay
interest and the repayment of their loans.
13. What are the informational needs of management?
Ans. Management needs timely information regarding sales, costs, profitability etc. for
planning, controlling and decision making.
14. Mention two advantages of accounting.
Ans. (i) It provides complete and systematic record;
(ii) It provides information regarding Profit or Loss
15. Write one limitation of accounting. (Delhi 2017)
Ans. Based on Historical Costs : Accounts are prepared on the basis of historical
costs (i.e., the original costs) and as such the figures given in the financial statements do not
show the effect of changes in price level.
16. Which qualitative characteristic of accounting information requires the use of common unit
and common format of reporting? (Chandigarh 2017)(KVS 2018)
Ans. Comparability.
17. ‘Accounting information should be verifiable and free from personal Bias’. Name the
qualitative characteristic of accounting information denoted by this statement.
Ans. Reliability.
18. Meena is owner of a Restaurant. She paid son’s fees from her personal bank account ₹
20,000. Whether this constitute her Business Transaction? Give reason. (KVS 2022)
Ans. No. It is not a business transaction. It relates to personal dealings of the Proprietor which
are not recorded in the books.
19. Book keeping is a systematic record of transactions. (K. V.S. 2020)
Ans. Business Transactions (or monetary aspect of financial transactions.
20. The process of accounting starts with and ends with (K. V.S. 2020)
Ans. The process of accounting starts with identification of transactions and ends with
preparation of trial balance and financial statements.

OBJECTIVE TYPE QUESTIONS

(A) Which of the following transactions are of financial character and will be recorded in the
books?
(i) Credit purchase of goods.
(ii) Strike by employees.
(iii) Goods worth ₹ 20,000 taken from the business and given by the proprietor to his friend as
gift.
(iv) Withdrawing of money by proprietor from business for personal use.
(v) Interviewing the candidates for employment.
(vi) Sale of household furniture for ₹ 10,000.
(vii) Payment of school fees of proprietor’s son from proprietor’s personal bank account.
(viii) Make promise to send the goods.
(ix) Receiving an order to send the goods.
(x) Loss of goods by fire.
(xi) Value of human resources.
Ans. (i), (iii), (iv), (x)
(B) State whether the following statements are true or false :
(i) Accounting is the language of business.
(ii) Accounting is helpful in raising loans.
(iii) Accounting is not accepted as evidence in legal matters.
(iv) Management of an enterprise is internal user of its accounting information.
(v) Accounting makes a record of qualitative aspects of business.
(vi) Accounting is a service function.
(vii) Accounts are prepared on the basis of historical costs.
(viii) Only those transactions are recorded in accounting which can be expressed in terms of
money.
(ix) Book-keeping starts where accounting ends.
(x) Creditors are external users of accounting information.
(xi) A creditor would use an entitie’s financial report to determine whether or not credit may be
granted to the firm.
(xii) Accounting may be affected by window dressing.
(xiii) The term Book-Keeping and Accounting can be used interchangeably.
(xiv) Accounting deals with quantifiable information.
(xv) Cost of goods manufactured is determined by management accounting.
Ans. True (i), (ii), (iv), (vi), (vii), (viii), (x), (xi), (xii), (xiv)
(C) Choose the best Alternate
1. Basic function of financial accounting is to :
(A) Record all business transactions
(B) Interpret cost data
(C) Assist the employees
(D) Interpret management data (Delhi 2021)
2. Financial Position of the business is determined by :
(A) Financial Accounting (B) Cost Accounting
(C) Management Accounting (D) All of these (Delhi 2021)
3. Book-keeping means :
(A) Keeping books
(B) Recording in books
(C) Recording of business transactions in the books
(D) All of the above
4. Book-keeping means:
(A) Recording financial transactions in the books of accounts.
(B) Taking all steps from recording of transactions in the books of original entries to preparation
of final accounts.
(C) Preparing Final Accounts
(D) Taking all steps after preparing final accounts.
5. Book keeping is a wider concept than accounting.
(A) True (B) False
(C) Partially true (D) Partially false (KVS 2021)
6. Accounting Starts :
(A) Where book-keeping begins
(B) Where book-keeping ends
(C) Where books are not maintained at all
(D) After preparing final accounts
7. In accounts recording is made of:
(A) Only Financial Transactions
(B) Only Non-financial transactions
(C) Financial and non-financial transactions
(D) Personal transactions of the Proprietor
8. The characteristics of Accounting are :
(A) Recording (B) Classifying
(C) Summarising (D) All of the above
9. Which of the following is not a business transaction?
(A) Withdrew ₹ 10,000 from business for personal use by the proprietor.
(B) Proprietor Withdrew ₹20,000 from the Bank Account of the firm to pay the school fees of
his son.
(C) Proprietor withdrew ₹ 12,000 from his personal account to pay the school fees of his son.
(D) Goods taken worth ₹3,000 for personal use. (KVS 2021)
10. Ghanshyam is a furniture dealer. Which one of the following will not be recorded in his
books?
(A) Purchase of Timber for ₹50,000
(B) Sofa set worth ₹40,000 taken to his home
(C) Sale of household furniture for ₹5,000
(D) Dining table of ₹ 30,000 given to his friend as gift
11. The functions of Accounting are :
(A) To ascertain Profit or Loss
(B) To ascertain the financial position of the Business
(C) To provide informations to various parties
(D) All of the above
12. The function of Accounting is not to :
(A) Record the transactions of business
(B) Record the personal transactions of the Proprietor
(C) Ascertain the Profit or Loss of business
(D) Ascertain the Financial Position of the business
13. Which of the following transactions is not of financial character?
(A) Purchase of asset on credit
(B) Purchase of asset for cash
(C) Withdrawing of money by proprietor from business
(D) Strike by Employees
14. Last step of accounting process is :
(A) Provide information to various parties who are interested in business enterprise
(B) Record transactions in the books
(C) To make summary in the form of financial statements
(D) To classify the transactions under separate heads in the ledger
15. Internal users of accounting information are :
(A) Potential Investors (B) Creditors
(C) Management (D) Employees
16. External users of accounting information are
(A) Researchers (B) Government
(C) Potential Investors (D) All of the above
17. External users of accounting information are not
(A) Lenders (B) Officers
(C) Employees (D) Public
18. Accounting Cycle starts with :
(A) Recording of Transactions in Ledger
(B) Recording of Transactions in Journal
(C) Preparing Trial Balance
(D) Preparing Trading Account
19. Creditors of the business want to know :
(A) Profitability of the Business
(B) Capability of the business to pay higher salaries
(C) Creditworthiness of the business
(D) Employment Opportunities
20. The advantages of accounting are
(A) Information regarding Profit or Loss
(B) Information regarding Financial Position
(C) Helpful in Prevention of Errors
(D) All of these
21. Which of the following is not the advantage of accounting?
(A) Systematic records
(B) Comparative Study
(C) Based on accounting concepts
(D) Helpful in decision making
22. Which of the following is an advantage of accounting?
(A) Based on Historical Costs
(B) Omission of Qualitative Information
(C) Incomplete information
(D) Detection of Errors
23. The limitations of accounting are :
(A) Influenced by Personal Judgements
(B) Based on Historical Costs
(C) Affected by window-dressing
(D) All of these
24. Purpose of financial accounting is to ascertain :
(A) Profit or Loss
(B) Value of assets and liabilities
(C) Financial Position
(D) Profit or Loss and financial position (Chandigarh 2021)
25. Which of the following is not a limitation of accounting?
(A) Window Dressing.
(B) It ignores the effect of price level changes.
(C) It ignores qualitative elements
(D) Can be used as evidence in court. (KVS 2021)
26. Users of Accounting Informations are
(A) Owners of Business (B) Management of Business
(C) Creditors (D) All of the above
27. Which one of the following is not an objective of accounting?
(A) To provide information about the assets, liabilities and capital of the enterprise
(B) To provide information about the private assets and liabilities of the proprietor
(C) To maintain records of the business
(D) To provide information regarding the profit and loss of the enterprise
28. The information provided in the financial statements of an enterprise pertains to ……….
(A) The nation as a whole (B) The industry as a whole
(C) Business enterprise (D) Proprietor
29. The branches of accounting are :
(A) Financial Accounting
(B) Cost Accounting
(C) Social Responsibility Accounting
(D) All of the above
30. Accounting is
(A) Only an Art (B) Only a Science
(C) Art and Science both (D) Neither Art nor Science
31. If accounting information is based on facts and it is verifiable by documents it has the
quality of ……………
(A) Relevance (B) Reliability
(C) 'Understandability (D) Comparability
32. Which of the following transactions is of a financial character and will be recorded in the
business?
(A) Goods taken from the business by the proprietor for her personal use
(B) Interviewing the candidates for employment
(C) Sale of Household furniture ₹ 5,000
(D) Received an order for sales of goods
33. Book-keeping is mainly concerned with :
(A) Recording of financial data
(B) Designing the systems of summarising the recorded data
(C) Interpreting the data for internal and external users
(D) Preparation of financial statements of the business enterprise
34. Which of the following is not a sub-field of accounting?
(A) Financial accounting
(B) Book Keeping
(C) Management accounting
(D) Cost Accounting
35. Which of the following is the most relevant accounting information for taxation authorities?
(A) Cash Balance of the firm (B) Book Value of the Fixed Assets
(C) Credit Sales of the year (D) Profit generated during the year
36. Which of the following limitations of accounting states that accounts may be manipulated
to conceal vital facts :
(A) Accounting is not fully exact
(B) Accounting may lead to window dressing
(C) Accounting ignores price level changes
(D) Accounting ignores qualitative elements
37. Which qualitative characteristics of accounting information is reflected when accounting
information is clearly presented?
(A) Relevance (B) Comparability
(C) Reliability (D) Understandability (KVS2021)
38. Use of common unit of measurement and common format of reporting promotes:
(A) Comparability (B) Reliability
(C) Relevance (D) Understandability (Delhi 2021)
39. Which of the following is included in Qualitative characteristics of accounting information:
(A) Reliability (B) Relevance
(C) Comparability (D) All of these (Delhi 2021)
40. Which of the following is not the user of accounting information :
(A) Long-term Creditors (B) Public
(C) Debtors (D) Government
41. Which one is the advantage of accounting?
(A) Shows the present value of the business
(B) Window Dressing
(C) Shows the effect of price level changes
(D) Replacement of Memory

[Ans. 1. (A) 2. (A) 3. (C) 4. (A) 5. (B)

6. (B) 7. (A) 8. (D) 9. (C) 10. (C)

11. (D) 12. (B) 13. (D) 14. (A) 15. (C)

16. (D) 17. (B) 18. (B) 19. (C) 20. (D)

21. (C) 22. (D) 23. (D) 24. (D) 25. (D)

26. (D) 27. (B) 28. (C) 29. (D) 30. (C)

31. (B) 32. (A) 33. (A) 34. (B) 35. (D)

36. (B) 37. (D) 38. (A) 39. (D) 40. (C)

41. (D)]
Chapter 2
VERY SHORT ANSWER QUESTIONS
(Questions Carrying 1 Mark)
1. What is Capital? (Delhi 2020)
Ans. It refers to the amount invested by the proprietor in a business enterprise. It can be
expressed as :
Capital = Assets - External Liabilities
2. What are Drawings? (KVS 2022)
Ans. Drawings refer to any Cash or value of goods withdrawn by' the owner for personal use.
3. What are Liabilities?
Ans. It refers to the amount which the firm owes to outsiders (expecting the amount owed to
proprietors).
4. What are Assets?
Ans. Assets are valuable resources owned by a business enterprise which can be measured
in terms of money.
5. What are Current Assets? (Delhi 2017)
Ans. Current Assets include Cash and other assets which are expected to be converted into
Cash within a short period (normally within one year).
6. Give two examples of Current Assets.
Ans. (i) Cash; (ii) Stock
7. Give two examples of Tangible Assets.
Ans. (i) Land and Building; (ii) Stock
8. Give two examples of Intangible Assets.
Ans. (i) Goodwill; (ii) Prepaid Expenses.
9. What are Fictitious Assets? (Chandigarh 2019)
Ans. These are the Assets which cannot be realised in Cash or no further benefit can
be derived from these assets. Such assets include Debit balance of P & L A/c and the
expenditure not yet written off such as Advertisement Expenses etc.
10. What are Current Liabilities?
Ans. Current liabilities refer to those liabilities which are to be paid in near future (normally
within one year).
11. Give two examples of Current Liabilities.
Ans. (i) Creditors; (ii) Bills Payable
12. What are Internal Liabilities? (KVS 2022)
Ans. All amounts which a business entity has to pay to the proprietor or owners are
internal liabilities such as capital and accumulated profits.
13. What is expense? (KVS 2019)
Ans. Expense is the cost incurred in producing and selling the goods and services.
14. What is revenue?
Ans. Revenue is the income of a recurring (regular) nature such as receipts from sale of goods,
rent, commission etc.
15. What is income?
Ans. Excess of revenue over expenses is called income.
Income = Revenue - Expenses
16. What is a Voucher? (KVS 2016)
Ans. A voucher is a document on the basis of which transactions are first recorded in the
books.
17. What is Trade Discount? (KVS 2022)
Ans. When discount is allowed by a seller to its customers at a fixed percentage on the list or
catalogue price of the goods it is called trade discount. It is not recorded in the books of
accounts.
18. What is Cash Discount?
Ans. When discount is allowed to the customers for making prompt payment it is called cash
discount. It is always recorded in the books of accounts.
19. What is meant by Purchases?
Ans. The term purchases is used for buying of goods for resale or for use in manufacturing
process. The term purchases includes both Cash and Credit purchase of goods.
20. What is meant by Sales?
Ans. The term sales is used for the amount of sale of goods and services rendered. The term
sales includes both Cash and Credit Sales.
21. Define Merchandise.
Ans. Merchandise means goods for resale.
22. Profit is earned on sale of Fixed Asset. What should be the accounting treatment of this
profit?
Ans. It is a capital profit. Hence, it should be transferred to capital reserve.
23. Give two examples of revenue expenditure. (KVS 2022)
Ans. (i) Cost of goods sold, (ii) salary.

OBJECTIVE TYPE QUESTIONS

(A) Fill in the blanks:
(i) Amount which the proprietor has invested in a business is known as …………….
(ii) Amount which the firm owes to outsiders is known as …………….
(iii) ……………. is the cost incurred in producing goods and services.
(iv) Revenue means the income of a ……………. nature.
(v) The term ‘sales’ is used only for the sales of ……………. and is never used for the sale of
…………….
(vi) The persons who still owe some amount to the business are termed as …………….
(vii) The persons to whom money is owing by the firm are termed as …………….
(viii) Assets held for continued use in the business and not meant for resale are termed as
…………….
(ix) ……………. are those assets which have a physical existence and which can be seen or
felt.
(x) ……………. refer to those liabilities which are to be paid normally within one year.
[Ans. : (i) Capital (ii) Liability (iii) Expenses
(iv) Regular or recurring (v) Goods, Assets (vi) Debtors
(vii) Creditors (viii) Fixed Assets (ix) Tangible Assets
(x) Current Liabilities.]
(B) State whether the following statements are True or False :
1. Amount owed to outsiders is called capital.
2. Goods include all those things which are purchased for resale.
3. Cost is the amount of resources given up in exchange for some goods or service.
4. Income = Expenses - Revenue
5. Liability = Assets - Capital
6. Creditors are current liabilities.
7. Intangible Assets are those assets which do not have physical existence.
8. Intangible Assets are not valuable assets.
Ans. True 2, 3, 5, 6, 7
False 1, 4, 8
(C) Classify the following into (i) Assets (ii) Liabilities (iii) Expenses and (iv) Revenues
Sales, Bank balance, Debtors, Bank Overdraft, Creditors, Salary to manager, Discount to
debtors, Cost of goods sold
[Ans. : (i) Assets : Bank balance, Debtors
(ii) Liabilities : Bank overdraft, creditors
(iii) Expenses : Salary to Manager, Discount to debtors, cost of goods sold.
(iv) Revenues: Sales.
(D) Choose the best Alternate
1. In a business ‘Purchases’ refers to the :
(A) Purchase of an article to be used in office.
(B) Purchase of goods for resale.
(C) Purchase of an assets to be used in factory.
(D) All of the above. (Delhi 2021)
2. Amount received or receivable against sale of goods is :
(A) Revenue Receipt
(B) Capital Receipt
(C) Sometimes revenue receipt and sometimes capital receipts
(D) Capital Reserve (Delhi 2021)
3. The term fixed assets include :
(A) Closing Stock (B) Bills Receivable
(C) Debtors (D) Furniture
4. The term current assets include :
(A) Debtors (B) Motor Vehicle
(C) Machinery (D) Building
5. Current assets do not include :
(A) Stock (B) Short term investment
(C) Prepaid expenses (D) Unearned income (Delhi 2021)
6. Tangible Asset is :
(A) Goodwill (B) Stock
(C) Patents (D) Prepaid Expenses
7. Intangible Asset is :
(A) Cash (B) Stock
(C) Goodwill (D) Land
8. Wasting Asset is :
(A) Machinery (B) Oil Wells
(C) Computer (D) All of the above
9. Fixed Liabilities include :
(A) Bank Overdraft (B) Long-term Loans
(C) Short-term loans (D) Creditors
10. Current Liabilities include :
(A) Bills Payable (B) Creditors
(C) Outstanding Expenses (D) All of the above
11. Which of the following is capital expenditure?
(A) Wages
(B) Wages paid for building construction
(C) Repair expenses of building
(D) Advertisement Expenses
12. Which of the following is Revenue Expenditure?
(A) Repair Expenses
(B) Building Construction Expenses
(C) Expenses on purchase of Machinery
(D) Purchase of Investments
13. A person who owes money to the firm is called …………….
(A) Debtor (B) Creditor
(C) Supplier (D) None of these
14. A person to whom money is owed by the firm is called …………….
(A) Debtor (B) Creditor
(C) Customer (D) None of these
15. Goods means :
(A) Commodity to be bought and sold
(B) Commodity to be bought but not to be sold
(C) Commodity to be used as an asset
(D) All of the above
16. Trade Discount is :
(A) Which is allowed at the time of receiving the payment
(B) Which is allowed at the time of sale of goods
(C) Which is allowed both at the time of receiving payment and sale of goods
(D) Allowed in all of the above
17. The person, firm or institution who does not pay the price in Cash for the goods purchased
or the services received is called :
(A) Propreitor (B) Debtor
(C) Creditor (D) All of these
18. Trade Discount allowed :
(A) Is shown separately in the books of accounts.
(B) Is not shown in the books of accounts.
(C) Can be shown either separately or deducted from purchase cost.
(D) All of the above. (Delhi 2021)
19. Cash Discount is :
(A) Which is received at the time of making the payment
(B) Which is allowed at the time of sale of goods
(C) Which is received at the time of purchase of goods
(D) Which is received both at the time of making payment and purchase of goods
20. Current assets do not include :
(A) Debtors (B) Motor Car
(C) Bank Balance (D) Prepaid Expenses
21. Tangible Assets do not include :
(A) Goodwill (B) Furniture
(C) Stock (D) Cash
22. Intangible Assets do not include :
(A) Patents (B) Trade Marks
(C) Stock (D) Prepaid Expenses
23. Wasting Assets do not include :
(A) Mines (B) Patents
(C) Land and buildings (D) Trade Marks
24. Current Liabilities include :
(A) Debentures (B) Bills Payable
(C) Long-term Loans (D) Capital
25. Current Liabilities do not include :
(A) Sundry Creditors (B) Bills Payable
(C) Outstanding Salaries (D) Prepaid Insurance
26. Patent is :
(A) Tangible Asset (B) Intangible Asset
(C) Current Asset (D) None of the Above
27. Maruti Car is :
(A) Current Asset (B) Intangible Asset
(C) Tangible Asset (D) None of the Above
28. Any expenditure, the full benefit of which is received during one accounting period is
termed as :
(A) Current Liability (B) Current Asset
(C) Capital Expenditure (D) Revenue Expenditure
29. Which of the following will be treated as drawings :
(A) Withdrawing money for payment of salary to employees
(B) Withdrawing money for payment to creditors
(C) Withdrawing money from business for private expenses
(D) Withdrawing money for purchase of asset
30. Main feature of business transaction is :
(A) It involves an economic activity
(B) It results in a change in the financial position of the firm
(C) Change must be capable of being expressed in terms of money
(D) All of the above
31. Current Liabilities do not include :
(A) Bills Payable (B) Creditors
(C) Outstanding Exp. (D) Debentures (KVS 2021)
32. The term sales is used only for the sales of ……………. and is never used for the sale of
…………….
(A) Assets, Investments (B) Assets, Goods
(C) Intangible Assets, Goods (D) Goods, Assets
33. Out of the following assets which one is NOT an intangible asset?
(A) Patents (B) Investments
(C) Goodwill (D) Trademark
34. At the end of financial year, during which sale of goods was worth ₹5,00,000, the closing
stock is valued at ₹40,000. This is …………….
(A) An event
(B) A transaction
(C) Both an event as well as transaction
(D) None of (A) and (B)
35. Which of the following is the Capital expenditure?
(A) Wages paid for repair of building
(B) Wages paid for white washing of building
(C) Wages paid for construction of building
(D) Wages paid for cleaning of building
36. Consider the following items :
1. Prepaid Salary 2. Accrued Interest (Receivable)
3. Loan (Short term) 4. Bank Overdraft
Current Liability would include :
(A) 1,2, 3, 4 (B) 2,3,4
(C) 4, 3, 1 (D) 3, 4
37. Goods used from stock of the business for business purposes are treated as the
……………. business but similar goods used by the proprietor for his personal use are treated
as …………….
(A) Inventory, expenditure
(B) Drawings, expenditure
(C) Drawings, inventory
(D) Expenditure, drawings (KVS 2021)
38. Livestock includes :
(A) Stock (B) Goods
(C) Animals (D) Life Insurance Policy (Chandigarh, 2021)

[Ans. 1. (B) 2. (A) 3. (D) 4. (A) 5. (D)

6. (B) 7. (C) 8. (B) 9. (B) 10. (D)

11. (B) 12. (A) 13. (A) 14. (B) 15. (A)

16. (B) 17. (B) 18. (B) 19. (A) 20. (B)

21. (A) 22. (C) 23. (C) 24. (B) 25. (D)

26. (B) 27. (C) 28. (D) 29. (C) 30. (D)

31. (D) 32. (D) 33. (B) 34. (C) 35. (C)

36. (D) 37. (D) 38. (C)]

 HIGHER ORDER THINKING SKILLS (HOTS) QUESTIONS
1. Godrej Ltd. imported from Germany one machinery for sale in India and another machinery
for production purpose. Will you treat them goods or fixed assets?
2. Mr. Jaspal Singh dealing in electronic goods sold 20 TV sets costing ₹30,000 each at ₹
40,000 each. Out of this ₹ 5,00,000 were received in cash and the balance is not yet received.
State the amount of revenue.
3. Mr. Dinanath who owed us ₹ 50,000 became insolvent and paid only 40% of this amount.
What is term used for the amount not received?
4. Why assets are classified into current and non- current?
5. Why receipts are classified into capital and revenue?
6. Why expenditure is classified into capital and revenue.
7. What is the reason that the capital expenditure is shown in the Balance Sheet?

ANSWERS TO HIGHER ORDER THINKING

SKILLS (HOTS) QUESTIONS
Ans.
1. First machinery will be treated as goods, and second machinery will be treated as Fixed
Asset.
2. Revenue will be ₹ 8,00,000 (i.e. 20 TV Sets × ₹40,000) Revenue is the amount either
received or receivable from sale of goods and services. Both cash sales and credit sales are
included in revenue.
3. Bad Debts.
4. Classification of assets into current and non-current helps in ascertaining the liquidity
position of the business entity. Non-Current Assets are held for continued use in the business
whereas current assets are expected to be converted into cash within one year.
5. Classification of receipts into capital receipts and revenue receipts is essential for the
preparation of financial statements since revenue receipts are shown on the credit side of
Trading and Profit and Loss Account whereas capital receipts are shown in the Balance Sheet.
6. Financial statements cannot be prepared without classifying the expenditure into capital
and revenue. Capital expenditure is written in the Balance Sheet whereas revenue
expenditure is written on the debit side of Trading or Profit and Loss Account.
7. Amount spent on acquiring or erection of fixed assets is termed as capital expenditure. Such
expenditure is shown in the assets because it yields benefit over a long period of time.

ASSERTION-REASON QUESTIONS
Given below are two statements, one labelled as Assertion (A) and other labelled as Reason
(R):
Which one of the following is correct?
Codes :
(A) Both (A) and (R) are true and (R) is the correct explanation of (A).
(B) Both (A) and (R) are true but (R) is not the correct explanation of (A).
(C) (A) is true, but (R) is false.
(D) (A) is false, but (R) is true.
1. Assertion (A):
Any expenditure that gives benefit for one accounting period is known as capital expenditure.
Reason (R):
A Revenue Expenditure, the benefit of which will accrue in more than one financial year has
to be written off in more than one accounting period is called Deferred Revenue Expenditure.
(KVS 2021)
2. Assertion (A):
Any expenditure which is incurred in acquiring and installation of an asset is capital
expenditure.
Reason (R):
Such expenditure yields benefit for a long period and hence added to assets.
3. Assertion (A):
Current Liabilities refer to those liabilities which are to be paid in near future (normally within
one month)
Reason (R):
Current Liabilities include Bank Overdraft, Creditors, Outstanding Expenses etc.
4. Assertion (A):
Tangible assets are those assets which can be seen and touched. Machinery, Motor-Vehicles,
Computer, Patents and Computer Software are tangible assets.
Reason (R):
Intangible assets are those assets which cannot be seen or felt. They are also valuable assets
and help the firm in earning profits as much as the tangible assets.
5. Assertion (A):
Capital expenditure is incurred for the purpose of increasing the earning capacity of the
business.
Reason (R):
Revenue expenditure is incurred for maintenance of earning capacity.
6. Assertion (A):
Capital is a liability of the firm towards the proprietor.
Reason (R):
Capital is a liability because the proprietor is separate and distinct from the business.
7. Assertion (A):
Expense is the cost of use of things or services for the purpose of generating revenue.
Reason (R):
Cost of goods sold and depreciation are expenses.
8. Assertion (A):
Profit is the excess of revenue over expenses during an accounting period. It results due to
business transactions which are regular in nature.
Reason (R):
Gain arises from transactions which are incidental to business such as sale of land & building.
9. Assertion (A):
Current assets refer to those assets which are held for continued use in the business.
Reason (R):
Debtors, Stock and Prepaid Expenses are current assets.
10. Assertion (A):
Fictitious assets are those assets which cannot be realised in cash or no further benefit can
be derived from these assets.
Reason (R):
Goodwill, patents and trade-marks are fictitious assets.

ANSWERS TO ASSERTION-REASON QUESTIONS

1. D 2. A 3. D 4. D 5. B

6. A 7. A 8. B 9. D 10. C
Chapter 3
VERY SHORT ANSWER QUESTIONS
(Questions Carrying 1 Mark)
1. Give two characteristics of accounting principles.
Ans. (i) Accounting principles are man made.
(ii) Accounting principles are flexible.
2. What is business entity Concept?
Ans. Business is treated as an entity separate and distinct from its owners.
3. What is money measurement Concept?
Ans. Only those transactions and events are recorded in accounting which can be expressed
in terms of money.
4. What is going concern concept? (KVS2019)
Ans. Business will continue to exist for a long time in the future and there is no intention to
close it or reduce its size significantly.
5. What is accounting period concept?
Ans. Entire life of an enterprise is divided into time intervals which are known as accounting
periods at the end of which a profit and loss account is prepared to ascertain the profit and a
balance sheet is prepared to ascertain the financial position.
6. What is cost concept?
Ans. Assets are shown in the books at cost of acquisition less depreciation.
7. What is dual aspect concept? (KVS 2019)
Ans. Every business transaction is recorded having a dual aspect. One aspect is debited while
other is credited.
8. What is matching concept?
Ans. All costs incurred during a particular period should be charged to revenue of that period
for determining the net profits.
9. How does the matching concept apply to depreciation?
Ans. According to matching concept, all costs which are incurred in an accounting period
should be charged against the revenue of that period. Hence depreciation of current year is
charged against the current year’s revenue. In other words, full cost of the asset is not treated
as an expense in the year of its purchase itself rather it is spread over its useful life.
10. What is accrual concept?
Ans. Revenue is recorded when sales are made or services are rendered and it is immaterial
whether cash is received or not.
11. What is convention of full disclosure?
Ans. There should be sufficient disclosure of information which is of significant interest to the
users of financial statements.
12. What is concept of consistency?
Ans. Accounting principles and methods once selected and adopted should be applied
consistently from one year to another.
13. What is convention of prudence or conservatism?
Ans. All anticipated losses should be recorded in the books of accounts, but all anticipated or
unrealized gains should be ignored.
14. What is convention of materiality?
Ans. Items having an insignificant effect or being irrelevant to the users of financial statements
need not be disclosed.
15. Which principle states that the financial statements should disclose all significant
informations?
Ans. Convention of Full Disclosure.
16. ‘Closing stock is valued at lower of cost or realisable value’. Which principle of Accounting
is applied here?
Ans. Convention of Prudence or Conservatism.
17. Why should a business follow the consistency Concept?
Ans. One of the qualitative characteristic of accounting information is comparability i.e., the
financial statements must be comparable from year to year. It is possible only when accounting
principles are not changed and followed consistently year after year.
18. State one limitation of historical cost.
Ans. During periods of inflation, the figure of net profit will be distorted because depreciation
based on historical cost will be charged against revenues at current prices.
19. Why the entire life of business is divided into time intervals? (Delhi 2019)
Ans. To ascertain the amount of profit earned or loss suffered by the business.
20. Under which principle, resignation by a Marketing Manager is not recorded in books of
accounts? (Chandigarh, 2018)
Ans. Money Measurement Concept.
21. Name and explain the accounting concept under which it becomes necessary for
Ans. business concerns to take their unsold stock at the end of the year to the next year.
(I.S.C. Specimen Question Paper, 2019)
Ans. Unsold Stock is carried forward to the next year as per matching concept.
22. Why capital of owner is shown on the liabilities side of balance sheet? (Delhi 2019)
Ans. Due to separate entity concept.

OBJECTIVE TYPE QUESTIONS

(A) Fill in the blanks
(i) Concept of …………… requires that the same accounting methods should be used from
one accounting period to the next.
(ii) Recognition of cost in the same period as associated revenues is called ……………
concept.
(iii) Personal transactions are distinguished from business transactions in accordance with the
concept of ……………
(iv) 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 ……………
convention. (KVS 2022)
(v) The fact that a business is separate and distinguishable from its owner is best exemplified
by the …………… concept. (NCERT)
(vi) Everything a firm owns, it also owes out to somebody. This co-incidence is explained by
the …………… concept. (KVS 2022)
(vii) 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. (NCERT)
(viii) A firm may hold stock which is heavily in demand. Consequently, the market value of this
stock may be increasing. Normal accounting procedure is to ignore this because of the
…………… (NCERT)
(ix) The management of a firm is remarkably incompetent, but the firm’s accountant cannot
take this into account while preparing books of accounts because of …………… concept.
(NCERT)
[Ans. (i) Consistency (ii) Matching (iii) Business Entity
(iv) Prudence (v) Business Entity (vi) Dual Aspect
(vii) Consistency (viii) Convention of Prudence
(ix) Money Measurement]
(B) Mention whether the following are true or false
(i) Convention of Prudence results in understatement of profits and assets and overstatement
of liabilities.
(ii) Business entity concept is not applicable to sole trading concerns and partnership
concerns.
(iii) Only those facts and events are recorded in accounting which are capable of being
expressed in terms of money.
(iv) All items or facts whether material or immaterial are recorded in accounting.
(v) Assets will be equal to capital if there are no liabilities.
(vi) Revenues are matched with expenses in accordance with going concern assumption.
(vii) Entire life of the firm is divided into time intervals for the measurement of profits in
accordance with ‘Going Concern Assumption’.
(viii) Materiality principle is an exception to the ‘Full Disclosure Convention’.
(ix) If a firm adopts different accounting principles in two accounting periods it conflicts with
the concept of consistency.
(x) The essence of convention of prudence is to anticipate no profit and provide for all possible
losses.
[Ans. : True : (i); (iii); (v); (viii); (ix); (x)
False : (ii); (iv); (vi); (vii)]
(C) Choose the best Alternate
1. Accounting Principles are :
(A) Made by Government (B) Made by man
(C) Made by Law (D) None of the above
2. Accounting principles mean :
(A) The rules which are adopted while recording the accounting transactions
(B) The rules which are adopted while preparing Profit & Loss Account
(C) The rules which are adopted while preparing balance sheet
(D) The rules which are adopted while preparing Director’s Report
3. Various names of accounting principles are :
(A) Assumptions (B) Conventions
(C) Concepts (D) All of the above
4. According to Business Entity Concept:
(A) Business is treated as a separate unit from its owner
(B) Business is not treated as a separate unit from its owner
(C) Personal transactions of owner are not distinguished from business transactions
(D) None of the above
5. According to Money Measurement Concept only those transactions are recorded in
accounting:
(A) Which are capable of being expressed in terms of money
(B) Which cannot be expressed in terms of money
(C) both of the above transactions
(D) None of the above
6. As per Going Concern Concept business will continue to exist:
(A) For a limited period (B) For 10 years
(C) For 25 years (D) For a long period in the future
7. As per Income Tax Act, accounting period is :
(A) From 1st January to 31st December
(B) From 1st April to 31st March
(C) From 1st July to 30th June
(D) From Diwali to Diwali
8. As per Cost Concept, an asset is recorded in the books
(A) At market value
(B) At going concern value
(C) At the price at which it was acquired
(D) At liquidation value
9. As per Dual Aspect Concept:
(A) Assets = Liabilities - Capital
(B) Assets = Capital - Liabilities
(C) Assets = Liabilities + Capital
(D) Capital = Assets + Liabilities
10. Accounting Period concept means :
(A) A period of 12 months (B) A period of 6 months
(C) Indefinite period (D) Period fixed by management
11. According to Dual Aspect Concept, the system of recording transactions is called :
(A) Double Account System (B) Double Entry System
(C) Double Book System (D) All of the above
12. As per Revenue Recognition Concept, revenue is deemed to be realised :
(A) When purchase order is received from the purchaser
(B) When goods are delivered to the purchaser
(C) When the title of the goods has been transferred to the purchaser
(D) When cash is received from the purchaser
13. Cost concept means :
(A) Sale of goods at cost price
(B) Sale of goods at market price
(C) Sale of goods at cost plus percentage of cost
(D) Recording of asset in the books at cost price
14. According to Objectivity Concept:
(A) There should be proper vouchers for checking every transaction
(B) There should be proper vouchers for checking every cash transaction
(C) There should be proper vouchers for checking every purchase-sale transaction
(D) There is no need of vouchers for checking of transactions
15. According to Convention of Full Disclosure
(A) All secrets of the business must be disclosed
(B) All significant information should be completely disclosed
(C) All accounts should be maintained honestly
(D) All accounts should be prepared quickly
16. Convention of Consistency means :
(A) All the firms in the same industry should use identical accounting principles and procedures
(B) All principles and procedures of accounting are utilised
(C) Accounting principles and methods should remain consistent from one year to another
(D) All of the above
17. Convention of conservatism takes into account:
(A) All future profits and losses
(B) All future profits and not losses
(C) All future losses and not profits
(D) Neither profits nor losses of the future
18. According to Convention of Conservatism closing stock is valued at:
(A) At cost Price
(B) At Realisable value
(C) Cost price or realisable value whichever is less
(D) At Real value
19. According to Convention of Conservatism :
(A) Provision is made for bad and doubtful debts
(B) Depreciation is charged on assets
(C) Recording is made of outstanding expenses
(D) All of the above
20. The concept that a business enterprise will not be sold or liquidated in the near future is
known as :
(A) Business Entity Concept
(B) Money Measurement Concept
(C) Matching Concept
(D) Going Concern Concept
21. According to which Concept even the proprietor of the business is treated as a creditor of
the business :
(A) Going concern Concept (B) Cost Concept
(C) Business Entity Concept (D) Accounting Period Concept
22. Due to which concept qualitative transactions are not recorded in the books :
(A) Business Entity Concept (B) Money Measurement Concept
(C) Historical cost concept (D) Dual Aspect Concept
23. Accrual concept is based on :
(A) Matching Concept (B) Dual Aspect concept
(C) Cost concept (D) Going concern concept
24. Cost price or realisable value, whichever is less, is used for the valuation of:
(A) Current Assets (B) Closing stock
(C) Fixed Assets (D) All Assets
25. According to which of the following, a business is considered to run for indefinite period :
(A) Business Entity Concept (B) Money Measurement Concept
(C) Historical cost concept (D) Going concern concept
26. Due to which of the following window dressing is prohibited :
(A) Convention of Consistency
(B) Accounting Period Concept
(C) Convention of full Disclosure
(D) Money Measurement Concept
27. According to which concept the same accounting methods should be used each year :
(A) Prudence (B) Full Disclosure
(C) Materiality (D) Consistency
28. Everything a firm owns, it also owes out to somebody. This is explained by which concept):
(A) Dual Aspect (B) Going Concern
(C) Money Measurement (D) Accounting Period
29. The ………. convention states that the method of providing depreciation adopted
in one year should be adopted each year :
(A) Full Disclosure (B) Consistency
(C) Prudence (D) Materiality
30. Due to which of the following, contingent liabilities are shown in the Balance Sheet:
(A) Dual Aspect Concept (B) Convention of Full Disclosure
(C) Convention of Materiality (D) Going Concern Concept
31. The cost of a small calculator is accounted as an expense and not shown as an asset in
a financial statements of a business entity due to ……………
(A) Materiality Convention (B) Matching concept
(C) Periodicity concept (D) Convention of full disclosure
32. According to the Cost Concept
(A) Assets are recorded at lower of cost and market value.
(B) Assets are recorded by estimating the market value at the time of purchase.
(C) Assets are recorded at the value paid for acquiring it.
(D) Assets are not recorded
33. Providing depreciation on fixed asset is in accordance with which of the following
principles/concepts.
(i) Going concern (ii) Matching Concept (ii) Materiality
(A) (i) & (ii) (B) (ii) & (iii)
(C) (i) & (iii) (D) All the three
34. The owner of the firm records his medical expenses in the firms’ income statement.
Indicate the principle that is violated.
(A) Cost Concept (B) Prudence
(C) Full disclosure (D) Entity concept
35. M/s Future Ltd. has invested ₹ 10,000 in the shares of Relicam Industries Ltd. Current
market value of these shares is ₹ 10,500. Accountant of Future Ltd. wants to show ₹ 10,500
as value of investment in the books of accounts, which accounting convention restricts him
from doing so?
(A) Full disclosure (B) Consistency
(C) Conservatism (D) Materiality
36. Which of these is not a fundamental accounting assumption?
(A) Going concern (B) Consistency
(C) Accrual (D) Materiality
37. Omission of paise and showing the round figures in financial statements is based on
……………
(A) Conservatism convention (B) Consistency concept
(C) Materiality convention (D) Money measurement concept
38. Income is measured on the basis of:
(A) Matching Concept (B) Consistency Concept
(C) Cost Concept (D) None of the above

[Ans. 1. (B) 2. (A) 3. (D) 4. (A) 5. (A)

6. (D) 7. (B) 8. (C) 9. (C) 10. (A)

11. (B) 12. (C) 13. (D) 14. (A) 15. (B)

16. (C) 17. (C) 18. (C) 19. (A) 20. (D)

21. (C) 22. (B) 23. (A) 24. (B) 25. (D)

26. (C) 27. (D) 28. (A) 29. (B) 30. (B)

31. (A) 32. (C) 33. (A) 34. (D) 35. (C)

36. (D) 37. (C) 38. (A)]

HIGHER ORDER THINKING SKILLS (HOTS) QUESTIONS

1. What is meant by GAAP?
2. Proprietor of the business is treated as creditor to the extent of his capital under which
Concept?
3. A customer of X Ltd. has discontinued his business. He used to purchase 30% of the total
goods produced by X Ltd. Is it a relevant information in your opinion and should be disclosed
by X Ltd.
4. X Ltd. gets a contract of ₹ 100 crore 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 justified?
5. Under which principle the calibre or quality of the management is not disclosed in the
balance sheet?
6. Which accounting principle states that all anticipated losses should be recorded but all
anticipated profits should be ignored?
7. According to which concept, depreciation is to be charged as per one particular method
year after year? (KVS 2022)
8. Why the full cost of an asset is not treated as an expense in the year of its purchase?
9. During the year the company purchased ballpoint pens of ?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?
10. A debtor who owes ₹ two lac to the Company is rumoured to be declared insolvent. Will
you disclose this information in the books?
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?
12. In a business provision for doubtful debts is created @5% on debtors every year. Name
the two accounting principles followed in this process.
13. A firm has stationery stock amounting to ₹400 as at the end of financial year. Accountant
of the firm has written it off to Profit & Loss Account. Is he right in doing so?
14. Why closing stock is valued at cost price or realisable value whichever is less?
15. Do you think that the Convention of conservatism results in creation of secret reserves?
16. Identify the values involved in the assumption of going concern. (KVS 2014)
17. Why fixed assets are not shown in the books at market value?
18. Why the entire life of the business enterprise is divided into time-intervals?
19. A company purchased goods for ₹5,00,000 and sold 80% of such goods during the year.
The market value of remaining goods was ₹90,000. The company valued the closing stock at
cost. Which principle is being violated?
20. On 25th March, 2023, 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, 2023. What is your opinion about this omission?
21. R Ltd. purchased 500 Sq. Metre Land for ₹ 1.5 crore to build a factory. At the end of year,
the market value of land was ₹ 1.3 5 crore. R Ltd. treated ₹ 15 Lakh as loss and recorded the
land at ₹ 1.35 crore. Is it a correct treatment?
22. Raja Ltd. purchased securities for ₹50 lakh. At the end of the year, the market value of
such securities was ₹40 lakh. While preparing the financial statements, the company valued
the securities at cost i.e. at ₹50 lakh. Is it a correct treatment?
23. A Company has been charging depreciation @ 10% p.a. on original cost method. It now
wants to change the method from original cost to diminishing balance method, the rate of
depreciation being 15% p.a. Can it do so?
24. Mohan, the owner of a business receives an order for supply of goods worth ₹2,00,000.
He has also received ₹25,000 against this order. Mohan wants to record it as a sale. Is Mohan
correct in doing so?
25. Land and Buildings are shown at ₹10 Lac in the Balance Sheet of the business owned by
Mr. Yuvraj. However, as per the certificate of Govt, approved valuer the realisable value of
Land and Building is ₹200 Lac. Mr. Yuvraj wants to show the Land and Building at this value
in his books. Can he do so?
26. Shyam purchased a building for ₹20 lakh. After a period of five years, the depreciation
charged on the building amounted to ₹3 lakh. However, due to boom in the property market,
the current market value of the building is ₹28 lakh. State the value at which building should
be recorded in the books of accounts. Also, give reasons for the same. (Chandigarh 2018)
27. ‘ ‘Materiality convention is an exception of the full disclosure concept. ’ ’ Do you agree with
the above statement? Give reason in support of your answer. (Delhi 2019)
28. Describe the relevance of accounting concepts/principles in accounting. Name the
concept/assumption related to the following statements :
(a) The cost of stationery is accounted as an expense and not shown as an asset in financial
statements.
(b) Provision for discount on creditors is not created.
(c) The owner of the business shows his capital as a liability and not shown as an asset.
(Delhi 2022)
ANSWER TO HIGHER ORDER THINKING
SKILLS (HOTS) QUESTIONS
1. Generally Accepted Accounting Principles.
2. Business Entity Concept.
3. Yes. The information is of material interest to the users of financial statements and must be
disclosed as per the Convention of full disclosure.
4. No, the management is not justified. Although the true profit or loss can be ascertained only
after the completion of the contract, it will be divided into time intervals of twelve months for
the ascertainment of profit as per Accounting Period Concept.
5. Money Measurement Concept.
6. Convention of Prudence.
7. Concept of Consistency.
8. 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 expense.
9. Materiality Convention will be followed in dealing with this item. As per this 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 expense and will be debited to Stationery Account.
10. Yes. As per convention of conservatism, all anticipated losses should be recorded, but all
anticipated gains should be ignored. Hence, provision for doubtful debts should be created in
anticipation of actual bad debts.
11. Business Entity Concept.
12. Consistency and Prudence.
13. Yes, the Accountant is right because he has followed the Materiality convention according
to which the items having insignificant effect may not be disclosed or in other words, may be
written off.
14. Closing stock is valued at lower of cost price or realisable value according to the
Convention of conservatism or prudence.
15. Yes Convention of conservatism will have two effects : (i) Profit and Loss Account discloses
lower profits in comparison to the actual profits, (ii) Balance Sheet will disclose understatement
of assets and overstatement of liabilities. These two effects result in creation of secret
reserves.
16. (i) It is because of this concept that a distinction is made between capital expenditure and
revenue expenditure.
(ii) It is because of this concept that full cost of an asset is not treated as an expense in the
year of purchase itself and the cost is spread over the useful life of the asset by charging
depreciation on a suitable basis.
(iii) It is because of this concept that outside parties purchase shares and debentures of the
enterprise.
17. Fixed assets are not shown in the books at market value because : (j) as per historical
concept, we record fixed assets at original cost, and (ii) as per going concern concept, the
assets are not going to be sold in the near future. Hence, the market value is irrelevant.
18. Entire life of the business enterprise is divided into time intervals of twelve months for the
ascertainment of profit.
19. Convention of conservatism or prudence.
20. The Company has violated the convention of full disclosure. Loss of Plant and Machinery
is a material information and should have been disclosed.
21. No. It is not a correct treatment. According to Cost Concept, a fixed asset is recorded in
the books at a price it was acquired.
22. No. It is not a correct treatment. The company has violated the convention of prudence
according to which current assets are valued at cost price or realisable value whichever is
less.
23. Yes. The method and the rate of depreciation can be changed but the change in method
will be treated as a change in accounting policy and the company should disclose the change
in its financial statements along with its impact on profit or loss.
24. No, he will not be correct in recording it as sales because the goods have not been
delivered as yet and hence the sale is not completed. Mohan has not earned the revenue so
far. Under the matching concept, revenue is recognised as earned only when cost incurred to
earn that revenue is also recognised as expense in that period.
25. No. Accounts are maintained on the concept of historical costs (i.e., the original cost).
According to this concept, an asset is recorded in the books of accounts at the price at which
it was acquired.
26. Building will be shown in the books at ₹17 Lakh.
This is because of Historical Cost Concept according to which assets are shown in the books
at cost less depreciation.
27. Yes, materiality convention is an exception to the concept of full disclosure. According to
the materiality convention, items having an insignificant effect or being irrelevant to the user
need not be disclosed due to unnecessarily overburdened while full disclosure concept states
that there should be a sufficient disclosure/complete disclosure of informations.
28. In order to make the accounting information meaningful to its internal and external users,
it is significant that such information is reliable as well as comparable. This becomes possible
only if the information provided by the financial statements is based on some set of rules
known as accounting concepts/principles.
Name of the concept is as follows :
(a) Materiality
(b) Conservation or prudence.
(c) Business entity concept.
Chapter 4
Mr. Ghosh gives the following information for the year ending 31st March, 2023:

Cash Purchases 15,00,000

Cash Sales 40,00,000

Credit Purchases 3,00,000

Credit Sales 5,00,000

Income received 80,000

Income received in advance (included in ₹80,000) 6,000

Income due but not yet received 15,000

Expenses paid 8,50,000

Expenses paid in advance (included in ₹8,50,000) 20,000

Expenses not yet paid 45,000

Ascertain the profit or loss if he adopts (i) Cash Basis of Accounting, and (ii) Accrual Basis of
Accounting.
SOLUTION:

(i) When Cash Basis of Accounting is followed :

Revenue : ₹

Cash Sales 40,00,000

Income received 80,000

(A) 40,80,000

Expenses :

Cash Purchases 15,00,000

Expenses Paid 8,50,000

(B) 23,50,000

Net Profit as per Cash Basis (A - B) 17,30,000

(ii) When Accrual Basis of Accounting is followed : ₹

Revenue :

Cash Sales 40,00,000

Credit Sales 5,00,000

Income Received 80,000

Less : Income Received in Advance 6,000

74,000

Add : Income due but not yet received 15,000 89,000

(A) 45,89,000

Expenses :

Cash Purchases 15,00,000

Credit Purchases 3,00,000

Expenses Paid 8,50,000

Less : Expenses paid in advance 20,000

8,30,000

Add : Expenses due but not yet paid 45,000 8,75,000

(B) 26,75,000

Net Profit as per Accrual Basis (A - B) 19,14,000

ILLUSTRATION 4.
Mr. Dushyant gives you the following information for the year ended 31st March, 2023 :

Cash Sales 8,00,000

Credit Sales 2,80,000

Cash Purchases 5,10,000

Credit Purchases 1,50,000

Salary Paid 80,000

Salary Outstanding 12,000

Rent Paid for 11 months 55,000

Insurance Expenses Paid (including prepaid ₹ 18,000) 24,000

Income received in advance 6,000

Income earned but not received 2,000

Income received (excluding income received in advance) 10,000

Determine the profit or loss if he adopts (i) Cash Basis of Accounting, and (ii) Accrual Basis of
Accounting.
SOLUTION':

(i) When Cash Basis of Accounting is followed :

Revenue: ₹

Cash Sales 8,00,000

Income received in advance 6,000

Income received 10,000

(A) 8,16,000

Expenses :

Cash Purchases 5,10,000

Salary Paid 80,000

Rent Paid 55,000

Insurance expenses paid 24,000

(B) 6,69,000

Net Profit as per Cash Basis (A - B) 1,47,000

(ii) When Accrual Basis of Accounting is followed :

Revenue : Cash Sales 8,00,000

Credit Sales 2,80,000

Income earned but not received 2,000

Income received 10,000

(A) 10,92,000

Expenses : Cash Purchases 5,10,000

Credit Purchases Salary Paid 80,000 1,50,000

Add: Salary Outstanding 12,000 92,000

Rent Paid 55,000

55,000
Add : Rent Outstanding for one month : 5,000 60,000
11
Insurance Expneses 24,000

Less: Prepaid 18,000 6,000

(B) 8,18,000

Net Profit as per Accrual Basis (A - B) 2,74,000

Distinction between Cash Basis of Accounting and Accrual Basis of Accounting:

Basis of Distinction Cash Basis of Accounting Accrual Basis of

Accounting

1. Recording of cash This basis records only the cash This basis makes a complete
and credit transactions transactions. record of all cash as well as
credit transactions.

2. Timing of Recording As per this basis, only those incomes As per this basis, all incomes
of incomes are recorded which have been are recorded whether cash is
received in cash. received for them or not.

3. Timing of Recording As per this basis, only those expenses As per this basis, all
of are recorded which have been paid in expenses are recorded
cash. whether cash is paid for them
expenses
or not.

4. Outstanding This basis does not take into This basis takes into
expenses, prepaid consideration outstanding expenses, consideration all such items.
expenses, accrued prepaid expenses, accrued incomes
incomes and incomes and incomes received in advance.
received in advance

5. Legal Position This basis is not recognised under the This basis is recognised
Companies Act, 2013. under the Companies Act,
2013.

6. Ascertainment of This basis does not ascertain correct This basis ascertains correct
correct profit or loss. profit or loss because it does not make profit or loss because it
a complete record of all cash and makes a complete record of
credit transactions. all cash and credit
transactions.

7. Suitability This basis is suitable for professional This basis is adopted by

people like doctors, lawyers etc. business enterprises with
profit motive.
Chapter 5
Q1Prepare ‘Accounting Equation’ from the following :
(a) Started business with cash ₹ 1,00,000.
(b) Purchased goods for cash ₹ 20,000 and on credit ₹ 30,000.
(c) Sold goods for cash costing ₹ 10,000 and on credit costing ₹ 15,000 both at a profit of
20%. (Chandigarh, 2018)
SOLUTION: 1
ACCOUNTING EQUATION

S. Transaction Assets = Liabilities + Capital

No.

Cash + Stock + Debtors = Creditors + Capital

(a) Started business with 1,00,000 + 0 + 0= 0 + 1,00,000

Cash

Equation 1,00,000 0 + 0= 0 + 1.00,000

(b) Purchased goods for (--) 20,000 + 50,000 + 0= 30,000 + 0

Cash ₹20,000 and on
Credit ₹30,000

New Equation 80,000 + 50,000 + 0= 30,000 + 1,00,000

(c) Sold goods for Cash (+) 12,000 (-) 25,000 + 18,000 = 0 5,000
costing ₹ 10,000 and on
Credit costing ₹ 15,000
both at a profit of 20%

Final Equation 92,000 + 25,000 + 18,000 = 30,000 1,05,000

Q2. Prove that Accounting Equation is satisfied in all the following transactions of Sameer
Goel:
(i) Started business with Cash ₹ 1,00,000.
(ii) Paid rent in advance ₹3,000.
(iii) Purchased goods for cash ₹50,000 and Credit ₹20,000.
(iv) Sold goods for Cash ₹ 80,000 costing ₹40,000.
(v) Paid salary in cash ₹4,500 and salary outstanding ₹ 1,000.
(vi) Bought motor cycle for personal use ₹30,000.

ANS ACCOUNTING EQUATION

S. No. Transaction Assets =Liabilities + Capital
 Cash + Stock + Prepaid = Creditors +Outstan- + Capital
Exp ding
exp.

Started business with

(i) Cash 1,00,000 . = 0 +1,00,000

Equation 1,00,000 = 0 +1,00,000

(ii) Paid rent in advance* - 3,000 + 3,000

New Equation 97,000 + 3,000 = 0 +1,00,000

Purchased goods for cash

₹ 50,000 and credit ₹
(iii) 20,000 - 50,000 + 70,000 + 0 = 20,000

New Equation 47,000 + 70,000 + 3,000 = 20,000 +1,00,000

Sold goods for cash ₹

(iv) 80,000 pasting ₹ 40,000 + 80,000 - 40,000 + 0 = 0 + 40,000

New Equation 1,27,000 + 30,000 + 3,000 = 20,000 +1,40,000

Paid salary in cash ₹

4,500 and salary
(v) outstanding* ₹ 1,000 - 4,500 + 0 + 0 = 0 + 1,000 - 5,500

New Equation 1,22,500 + 30,000 + 3,000 = 20,000 + 1,000 +1,34,500

Bought motor cycle for

(iv) personal use ₹30,000 - 30,000 + 0 + 0 = 0 + 0 - 30,000

Final Equation 92,500 + 30,000 + 3,000 = 20,000 + 1,000 +1,04,500

Q3.
Prove that the accounting equation is satisfied in all the following transactions of Sudhir:—
1. Started business with Cash ₹50,000 and goods ₹20,000.
2. Bought goods for Cash ₹ 15,000 and on credit for ₹ 10,000.
1
3. Goods Costing ₹24,000 sold at a profit of 33 %. Half the payment received in cash.
3

4. Purchased furniture for office use ₹6,000 and for household use of Sudhir ₹4,000.

S. No. Transaction Assets = + Capital

Liabilities

1. Started business with Cash Cash + Stock + + = + Capital

₹50,000 and goods ₹20,000 Debtors Furniture Creditors
+ 70,000
+0 +0 =0
50,000 + 20,000

Equation 50,000 + 20,000 +0 +0 =0 + 70,000

2. Bought goods for Cash ₹ (-) 15,000 + 25,000 +0 + 0 = 10,000 + 0
15,000 and on credit for ₹
10,000

New Equation 35,000 + 45,000 +0 + 0 = 10,000 + 70,000

3. Goods costing ₹ 24,000
sold at a profit of33j%. Half
+ 16,000 - 24,000 + 16,000 +0 =0 + 8,000
the payment received in Cash

New Equation 51,000 + 21,000 + 16,000 + 0 = 10,000 + 78,000

4. Purchased furniture for
office use ₹6,000 and for
household use of Sudhir
₹4,000 (-) 10,000 +0 +0 + 6,000 = 0 (-) 4,000

Final Equation 41,000 + 21,000 + 16,000 + 6,000 10,000 + 74,000

Q5.
(a) Surender Mohan started business on 1st April, 2022 with Capital of ₹7,50,000 and a loan
of ₹2,00,000 taken from Punjab National Bank. On 31st March, 2023 his assets were ₹
15,00,000. Find out his Capital on 31st March, 2023 and profits made or losses incurred during
the year 2022-23.
(b) If in the above illustration, the proprietor had introduced additional capital of ₹ 1,25,000
and had withdrawn ₹40,000 for personal purposes, find out the profit.
SOLUTION:

(a) Closing Capital = Closing Assets - Closing Liabilities

= ₹ 15,00,000 - ₹2,00,000

= ₹ 13,00,000

Profit = Closing Capital - Opening Capital

= ₹ 13,00,000 - ₹7,50,000

= ₹5,50,000

(b) Profit = Closing Capital + Drawing - Additional Capital - Opening Capital

= ₹ 13,00,000 + ₹40,000 - ₹ 1,25,000 - ₹7,50,000

= ₹4,65,000

Q6
Give an example for each of the following type of transactions :
(i) Increase in one asset, decrease in another asset.
(ii) Increase in asset, increase in liability.
(iii) Increase in asset, increase in owner’s capital.
(iv) Decrease in asset, decrease in liability.
(v) Decrease in asset, decrease in owner’s capital.
SOLUTION:

(i) Purchase of Machinery for Cash : Increase in Machinery and decrease in Cash

(ii) Purchase of Machinery on Credit : Increase in Machinery and increase in liability

(iii) Capital introduced by proprietor : Increase in Cash and increase in Capital

(iv) Payment to Creditors : Decrease in Cash and decrease in Creditors

(v) Cash withdrawn by proprietor from : Decrease in Cash and decrease in Capital
the business for personal use