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Table of Contents
Sr. Particulars Page Number
No
1 Theoretical Framework
1.1 Meaning and Scope of Accounting 1.1.1 – 1.1.6
1.2 Accounting Concepts, Principles and Conventions 1.2.1 – 1.2.12
1.3 Capital and Revenue Expenditures and Receipts 1.3.1 – 1.3.8
1.4 Contingent Assets and Contingent Liabilities 1.4.1 – 1.4.3
1.5 Accounting Policies 1.5.1 – 1.5.3
1.6 Accounting as a Measurement Discipline – Valuation Principles, 1.6.1 – 1.6.3
Accounting Estimates
1.7 Accounting Standards 1.7.1 – 1.7.3
2 Accounting Process
2.1 Basic Accounting Procedures – Journal entries 2.1.1 – 2.1.23
2.2 Ledgers 2.2.1 – 2.2.9
2.3 Trial Balance 2.3.1 – 2.3.9
2.4 Subsidiary Books 2.4.1 – 2.4.9
2.5 Cash Book 2.5.1 – 2.5.11
2.6 Rectification of Errors 2.6.1 – 2.6.26
3 Bank Reconciliation Statement 3.1 – 3.28
4 Inventories 4.1 – 4.17
5 Depreciation and Amortization 5.1 – 5.28
6 Bills of Exchange and Promissory Notes 6.1 – 6.20
7 Preparation of Final Accounts of Sole Proprietors
7.1 Final Accounts of Non-Manufacturing Entities 7.1.1 – 7.1.38
7.2 Final Accounts of Manufacturing Entities 7.2.1 – 7.2.12
8 Financial Statements of Not-for-Profit Organizations 8.1 – 8.1.41
9 Accounts from Incomplete Records 9.1 – 9.47
10 Partnership and LLP Accounts
10.1 Introduction to Partnership Accounts 10.1.1 – 10.1.20
10.2 Treatment of Goodwill in Partnership Accounts 10.2.1 – 10.2.14
10.3 Admission of a New Partner 10.3.1 – 10.3.32
10.4 Retirement of a Partner 10.4.1 – 10.4.28
10.5 Death of a Partner 10.5.1 – 10.5.21
10.6 Dissolution of Partnership Firms and LLPs 10.6.1 – 10.6.36
11 Company Accounts
11.1 Introduction to Company Accounts 11.1.1 – 11.1.5
11.2 Issue, Forfeiture and Re-Issue of Shares 11.2.1 – 11.2.35
11.3 Issue of Debentures 11.3.1 – 11.3.16
11.4 Accounting for Bonus Issue and Right Issue 11.4.1 – 11.4.19
11.5 Redemption of Preference Shares 11.5.1 – 11.5.25
11.6 Redemption of Debentures 11.6.1 – 11.6.14
 1.1-1

Chapter 1.1
Meaning and Scope of Accounting

Section A: Study Material Questions

Illustrations & Examples

Question 1 (illustration)
An individual invests ₹ 2,00,000 for running a stationery business. On 1st January, he purchases goods
for ₹ 1,15,000 and sells for ₹ 1,47,000 during the month of January. He pays shop rent for the month
₹ 5,000 and finds that still he has goods worth ₹ 15,000 in hand. The individual performs an economic
activity. He carries on a few transactions and encounters with some events. Is it not logical that he will
want to know the result of his activity?
Answer 1
We see that the individual, who runs the stationery business, earns a surplus of ₹ 42,000.
₹
Goods sold 1,47,000
Goods in hand 15,000
1,62,000
Less : Goods purchased 1,15,000
Shop rent paid 5,000 (1,20,000)
Surplus 42,000
Earning of ₹ 42,000 surplus is an event; also having the inventories in hand is another event, while
purchase and sale of goods, investment of money and payment of rent are transactions.

True and False

Question 1
There is no difference between book keeping and accounting, both are same.
Answer 1
False: Book-keeping and accounting are different from each other. Accounting is a broad subject. It calls
for a greater understanding of records obtained from book- keeping and an ability to analyse and interpret
the information provided by book- keeping records.
Book-keeping is the recording phase while accounting is concerned with the summarizing phase of an
accounting system.

Question 2
Management Accounting covers the preparation and interpretation of financial statements and
communication to the users of accounts.
Answer 2
False: Financial accounting covers the preparation and interpretation of financial statements and
communication to the users of accounts.

Question 3
Financial accounting is concerned with internal reporting to the managers of a business unit.
Answer 3
False: Management accounting is concerned with internal reporting to the managers of a business unit.

Question 4
Customers of business should not be considered as users of accounts prepared by business. They are not
interested to know performance of the business

Chapter 1.1 Meaning and Scope of Accounting

 1.1-2

Answer 4
False: Customers are also concerned with the stability and profitability of the enterprise because their
functioning is more or less dependent on the supply of goods.

Question 5
Summarising is the basic function of accounting. All business transactions of a financial characters
evidenced by some documents such as sales bill, pass book, salary slip etc. are recorded in the books of
account.
Answer 5
False: Recording is the basic function of accounting. Summarising is concerned with the preparation and
presentation of the classified data in a manner useful to the internal as well as the external users of
financial statements.

Question 6
Balance sheet shows the position of the business on the day of its preparation and not on the future
date.
Answer 6
True: Balance Sheet is a statement of the financial position of an enterprise at a given date.

Question 7
Objectives of book-keeping are complete recording of transactions & ascertainment of financial effect
on the business.
Answer 7
True: Book-keeping is concerned with complete recording and combined effect of transactions made
during the accounting period.

Multiple Choice Questions

Question 1
Which of the following is not a subfield of accounting?
(a) Management accounting.
(b) Cost accounting.
(c) Book-keeping
Answer 1 : (c)

Question 2
Purposes of an accounting system include all the following except
(a) Interpret and record the effects of business transaction.
(b) Classify the effects of transactions to facilitate the preparation of reports.
(c) Dictate the specific types of business enterprise transactions that the enterprises may engage in.
Answer 2 : (c)

Question 3
Book-keeping is mainly concerned with
(a) Recording of financial data
(b) Designing the systems in recording, classifying and summarising the recorded data.
(c) Interpreting the data for internal and external users.
Answer 3 : (a)

Question 4
All of the following are functions of Accounting except
(a) Decision making.
(b) Ledger posting.
(c) Forecasting.
Answer 4 : (b)
Chapter 1.1 Meaning and Scope of Accounting
 1.1-3

Question 5
Financial statements are part of
(a) Accounting.
(b) Book-keeping.
(c) Management Accounting.
Answer 5 : (a)

Question 6
Financial position of the business is ascertained on the basis of
(a) Records prepared under book-keeping process.
(b) Trial balance.
(c) Balance Sheet.
Answer 6 : (c)

Question 7
Users of accounting information include
(a) Creditors/Suppliers
(b) Lenders/ Customers
(c) Both (a) and (b)
Answer 7 : (c)

Question 8
Financial statements do not consider
(a) Assets expressed in monetary terms.
(b) Liabilities expressed in monetary terms.
(c) Assets and liabilities expressed in non-monetary terms
Answer 8 : (c)

Question 9
On January 1, Sohan paid rent of ₹ 5,000. This can be classified as
(a) An event.
(b) A transaction.
(c) A transaction as well as an event.
Answer 9 : (b)

Question 10
On March 31, 2022 after sale of goods worth ₹ 2,000, he is left with the closing inventory of ₹ 10,000.
This is
(a) An event.
(b) A transaction.
(c) A transaction as well as an event.
Answer 10 : (a)

Question 11
Which of the following is not a business transaction?
(a) Bought a machine of ₹10,000 for business
(b) Paid towards salaries of employees ₹ 5,000
(c) Paid son’s fees from her personal bank account ₹ 8,000
Answer 11 : (c)

Question 12
Which qualitative characteristics of accounting information is reflected when accounting information is
clearly presented?
(a) Understandability
(b) Relevance
Chapter 1.1 Meaning and Scope of Accounting
 1.1-4

(c) Comparability
Answer 12 : (a)

Theoretical Questions & Answers

Question 1
Define accounting. What are the sub-fields of accounting?
Answer 1
Accounting is the art of recording, classifying, and summarising in a significant manner and in terms of
money, transactions and events which are, in part at least, of a financial character, and interpreting the
result thereof. Various subfields of accounting are listed as: Financial Accounting; Management
Accounting; Cost Accounting; Social Responsibility Accounting and Human Resource Accounting.

Question 2
Who are the users of accounting information?
Answer 2
Users of accounts can be listed as Investors, Employees, Lenders, Suppliers and Creditors, Customers, Govt.
and their agencies, public and Management.

Question 3
Discuss briefly the relationship of accounting with
(i) Economics (ii) Statistics (iii) Law
Answer 3
(i) Accounting and Economics: Economics is viewed as a science of rational decision- making about the
use of scarce resources. It is concerned with the analysis of efficient use of scarce resources for
satisfying human wants. This may be viewed either from the perspective of a single firm or of the
country as a whole.
Accounting is viewed as a system, which provides data to the users to permit informed judgement and
decisions. Some non-accounting data are also relevant for decision- making.
Accounting overlaps economics in many respects. It contributed a lot in improving the management
decision-making process. But, economic theories influenced the development of the decision-making
tools used in accounting.
However, there exists a wide gulf between economists’ and accountants’ concepts of income and
capital. Accountants got the ideas of value, income and capitalmaintenance from economists, but
brushed suitably to make them usable in practical circumstances. Accountants developed the
valuation, measurement and decision- making techniques which may owe to the economic theorems
for origin but these are moulded in the work environment and suitably tempered with reference to
relevance, verifiability, freedom from bias, timeliness, comparability, reliability and understandability.
(ii) Accounting and Statistics: The use of statistics in accounting can be appreciated better inthe context of
the nature of accounting records. Accounting information is very precise; it is exact to the last paisa.
But, for decision-making purposes such precision is not necessary and hence, the statistical
approximations are sought.
In accounts, all values are important individually because they relate to business transactions. As
against this, statistics is concerned with the typical value, behaviour or trend over a period of time or
the degree of variation over a series of observations. Therefore, wherever a need arises for only broad
generalisations or the average of relationships, statistical methods have to be applied in accounting
data.
Further, in accountancy, the classification of assets and liabilities as well as the headsof income
and expenditure has been done as per the needs of financial recording to ascertain financial results of
various operations. Other types of classification like the geographical and historical ones and ad hoc
classification are done depending on the purpose to make such classification meaningful.
Accounting records generally take a short-term view of events and are confined to a year while
statistical analysis is more useful if a longer view is taken for the purpose. For example, to fit the trend
line a longer period will be required. However, statistical methods do use past accounting records
maintained on a consistent basis.
Chapter 1.1 Meaning and Scope of Accounting
 1.1-5

The functional relations showing mathematical relations of one variable with one or more other
variables are based on statistical work. These relations are used widely in making cost or price estimates
for some estimated future values assigned to the given independent variables. For example, given the
functional relation of total cost to the price of an input, the effect of changes in future prices on the
cost of production can be calculated.
In accountancy, a number of financial and other ratios are based on statistical methods, which help in
averaging them over a period of time. Several accounting and financial calculations are based on
statistical formulae.
Statistical methods are helpful in developing accounting data and in their interpretation. For example,
time series and cross-sectional comparison of accounting data is based on statistical techniques. Now-
a-days multiple discriminate analysis is popularly used to identify symptoms of sickness of a business
firm. Therefore, the study and application of statistical methods would add extra edge to the accounting
data.
(iii) Accounting and Law: An economic entity operates within a legal environment. All transactions with
suppliers and customers are governed by the Contract Act, the Sale of Goods Act, the Negotiable
Instruments Act, etc. The entity itself is created andcontrolled by laws. For example, a company is
created by the Companies Act and also controlled by Companies Act.
Similarly, every country has a set of economic, fiscal and labour laws. Transactions and events are
always guided by laws of the land. Very often the accounting system to be followed has been prescribed
by the law. For example, the Companies Act has prescribed the format of financial statements for
companies.
Banking, insurance and electric supply undertakings may also have to produce financial statements as
prescribed by the respective legislations controlling such entities.
However, legal prescription about the accounting system is the product of developmentsin accounting
knowledge. That is to say, legislation about accounting system cannot be enacted unless there is a
corresponding development in the accounting discipline. In that way accounting influences law and is
also influenced by law.

Section B: RTP, MTP & PYP Questions

Question 1
What services can a Chartered Accountant provide to the society?
(RTP Jun’24, MTP 4 Marks Mar’22, SM)
Answer 1
The practice of accountancy has crossed its usual domain of preparation of financial statements,
interpretation of such statements and audit thereof. Chartered Accountants are presently taking active
role in company laws and other corporate legislation matters, in taxation laws matters (both direct and
indirect) and in general management problems.
Some of the services rendered by chartered accountants to the society are briefly mentioned hereunder:
(i) Maintenance of books of accounts;
(ii) Statutory audit;
(iii) Internal Audit;
(iv) Taxation;
(v) Management accounting and consultancy services;
(vi) Financial advice and financial investigations etc.
(vii) Other services like secretarial work, share registration work, company formation receiverships,
arbitrations etc.

Question 2
Discuss the limitations which must be kept in mind while evaluating the Financial Statements.
(MTP 4 Marks Dec’23, Nov’22, Apr’24, RTP May’23, SM)
Answer 2
Limitations which must be kept in mind while evaluating the Financial Statements are as follows:
• The factors which may be relevant in assessing the worth of the enterprise don’t find place in the
accounts as they cannot be measured in terms of money.

Chapter 1.1 Meaning and Scope of Accounting

 1.1-6

• Balance Sheet shows the position of the business on the day of its preparation and not on the future
date while the users of the accounts are interested in knowing the position of the business in the near
future and also in long run and not for the past date.
• Accounting ignores changes in some money factors like inflation etc.
• There are occasions when accounting principles conflict with each other.
• Certain accounting estimates depend on the sheer personal judgement of the accountant.
• Different accounting policies for the treatment of same item adds to the probability of manipulations.

Question 3
What are the sub-fields of accounting? (PYP 5 Marks Dec’23)
Answer 3
The various sub-fields of accounting are:
(i) Financial Accounting – It covers the preparation and interpretation of financial statements and
communication to the users of accounts. It is historical in nature as it records transactions which had
already been occurred. The final step of financial accounting is the preparation of Profit and Loss Account
and the Balance Sheet. It primarily helps in determination of the net result for an accounting period and
the financial position as on the given date.
(ii) Management Accounting – It is concerned with internal reporting to the managers of a business unit. To
discharge the functions of stewardship, planning, control, and decision- making, the management needs
variety of information. The different ways of grouping information and preparing reports as desired by
managers for discharging their functions are referred to as management accounting. A very important
component of the management accounting is cost accounting which deals with cost ascertainment and
cost control.
(iii) Cost Accounting – The process of accounting for cost which begins with the recording of expenditure or
the bases on which they are calculated and ends with the preparation of periodical statements and
reports for ascertaining and controlling costs.
(iv) Social Responsibility Accounting – The demand for social responsibility accounting stems from increasing
social awareness about the undesirable by- products of economic activities., Social responsibility
accounting is concerned with accounting for social costs incurred by the enterprise and social benefits
created.
(v) Human Resource Accounting – Human resource accounting is an attempt to identify, quantify and report
investments made in human resources of an organisation that are not presently accounted for under
conventional accounting practice.

Chapter 1.1 Meaning and Scope of Accounting

 1.2-1

Chapter 1.2
Accounting Concepts, Principles and Conventions

Section A: Study Material Questions

Examples & Illustrations

Example 1:
Mr. X started business investing ₹ 7,00,000 with which he purchased machinery for ₹ 5,00,000 and
maintained the balance in hand. The financial position of the will be as follows:
₹
Capital 7,00,000
Machinery 5,00,000
Cash 2,00,000
This means that the enterprise owes to Mr. X ₹ 7,00,000. Now if Mr. X spends ₹ 5,000 to meet his family
expenses from the business fund, then it should not be taken as business expenses and would be charged
to his capital account (i.e., his investment would be reduced by ₹ 5,000). Following the entity concept the
revised financial position would be
Liability ₹ ₹
Capital 7,00,000
Less : Drawings (5,000) 6,95,000
Machinery 5,00,000
Cash 1,95,000

Example 2:
Mr. X purchased a piece of land on 1.1.1995 paying ₹ 2,000. Its current market value is ₹ 1,02,000 on
31.12.2022. Should the accountant show the land at ₹ 2,000 following cost concept and ignoring
₹1,00,000 value increase since it is not realised? If he does so, the financial position would be:
BALANCE SHEET
Liabilities ₹ Asset ₹
Capital 2,000 Land 2,000
2,000 2,000
Is it not proper to show it in the following manner?
BALANCE SHEET
Liabilities ₹ Asset ₹
Capital 2,000 Land 1,02,000
Unrealised Gain 1,00,000
1,02,000 1,02,000
Now-a-days the revaluation of assets has become a widely accepted practice when the change in value is
of permanent nature. Accountants adjust such value change through creation of revaluation (capital)
reserve.
Thus, the going concern, cost concept and realization concept gives the valuation criteria.

Example 3:
BALANCE SHEET
Liabilities ₹ Asset ₹
Capital 1,50,000 Machinery 2,00,000
Bank Loan 75,000 Cash 1,00,000
Other Loan 75,000
3,00,000 3,00,000
Transactions:
(a) A new machine is purchased paying ₹ 50,000 in cash.
(b) A new machine is purchased for ₹ 50,000 on credit, cash is to be paid later on.
(c) Cash paid to repay bank loan to the extent of ₹ 50,000.
(d) Raised bank loan of ₹ 50,000 to pay off other loan.
Chapter 1.2 Accounting Concepts, Principles and Conventions
 1.2-2

Effect of the Transactions:

(a) Increase in machine value and decrease in cash balance by ₹ 50,000.
BALANCE SHEET (1 & 3)
Liabilities ₹ Asset ₹
Capital 1,50,000 Machinery 2,50,000
Bank Loan 75,000 Cash 50,000
Other Loan 75,000
3,00,000 3,00,000
(b) Increase in machine value and increase in Creditors by ₹ 50,000.
BALANCE SHEET (1 & 3)
Liabilities ₹ Asset ₹
Capital 1,50,000 Machinery 2,50,000
Creditors for machinery 50,000 Cash 1,00,000
Bank Loan 75,000
Other Loan 75,000
3,50,000 3,50,000
(c) Decrease in bank loan and decrease in cash by ₹ 50,000.
BALANCE SHEET (4 & 8)
Liabilities ₹ Asset ₹
Capital 1,50,000 Machinery 2,00,000
Bank Loan 25,000 Cash 50,000
Other Loan 75,000
2,50,000 2,50,000
(d) Increase in bank loan and decrease in other loan by ₹ 50,000
BALANCE SHEET (5 & 7)
Liabilities ₹ Asset ₹
Capital 1,50,000 Machinery 2,00,000
Bank Loan 1,25,000 Cash 1,00,000
Other Loan 25,000
3,00,000 3,00,000
We may conclude that every transaction and event has two aspects.
This gives basic accounting equation :
Equity (E) + Liabilities (L) = Assets (A)
Or
Equity (E)= Assets (A) – Liabilities(L)
Or, Equity + Long Term Liabilities + Current Liabilities = Fixed Assets + Current Assets
Or, Equity + Long Term Liabilities = Fixed Assets + (Current Assets – Current Liabilities)
Or, Equity = Fixed Assets + Working Capital – Long Term Liabilities

Question 1 (ILLUSTRATION)
Develop the accounting equation from the following information:
Particulars March 31, 2021 ₹ March 31, 2022 ₹
Capital 1,00,000 ?
12% Bank Loan 1,00,000 1,00,000
Trade Payables 75,000 70,000
Fixed Assets 1,25,000 1,10,000
Trade Receivables 75,000 80,000
Inventory 70,000 80,000
Cash & Bank 5,000 6,000
Required
Find the profit for the year & the Balance sheet as on 31/3/2022.
Answer 1
For the year ended March 31, 2021:
Equity = Capital ₹ 1,00,000
Liabilities = Bank Loan + Trade Payables

Chapter 1.2 Accounting Concepts, Principles and Conventions

 1.2-3

₹ 1,00,000 + ₹ 75,000 = ₹ 1,75,000

Assets = Fixed Assets + Trade Receivables + Inventory + Cash & Bank
₹ 1,25,000 + ₹ 75,000 + ₹ 70,000 + ₹ 5,000 = ₹ 2,75,000
Equity + Liabilities = Assets
₹ 1,00,000 + ₹ 1,75,000 = 2,75,000
For the year ended March 31, 2022:
Assets = ₹ 1,10,000 + ₹ 80,000 + ₹ 80,000 + ₹ 6,000 = ₹ 2,76,000
Liabilities = ₹ 1,00,000 + ₹ 70,000 = ₹ 1,70,000
Equity = Assets – Liabilities = ₹ 2,76,000 – ₹ 1,70,000 = ₹ 1,06,000
Profits = New Equity – Old Equity = ₹ 1,06,000 – ₹1,00,000 = ₹ 6,000

True and False

Question 1
The concept helps in keeping business affairs free from the influence of the personal affairs of the owner
is known as the matching concept.
Answer 1
False: Under matching concept all expenses matched with the revenue of that period should only be taken
into consideration. In the financial statements of the organization if any revenue is recognized then
expenses related to earn that revenue should also be recognized.

Question 2
Entity concept means that the enterprise is liable to the owner for capital investment made by the
owner.
Answer 2
True: Since the owner invested capital, he has claim on the profits of the enterprise.

Question 3
Accrual means recognition as money is received or paid and not of revenue and costs as they are earned
or incurred.
Answer 3
False: Under accrual concept, the effects of transactions and other events are recognised on mercantile
basis i.e., when they occur (and not as cash or a cash equivalent is received or paid) and they are recorded
in the accounting records and reported in the financial statements of the periods to which they relate.

Question 4
The Conservatism Concept states that no change should be counted unless it has materialized.
Answer 4
False: The Realisation Concept states that no change should be counted unless it has materialised.

Question 5
The concept of consistency implies non-flexibility as not to allow the introduction of improved method
of accounting.
Answer 5
False: The concept of consistency does not imply non-flexibility as not to allow the introduction of
improved method of accounting.

Question 6
The materiality depends only upon the amount of the item and not upon the size of the business, nature
and level of information, level of the person making the decision etc.
Answer 6
False: As per materiality principle, all the items having significant economic effect on the business of the
enterprise should be disclosed in the financial statements.

Chapter 1.2 Accounting Concepts, Principles and Conventions

 1.2-4

Question 7
Accrual basis of accounting is the method of recording transactions by which revenues and costs and
assets and liabilities are reflected in the accounts in the period in which actual receipts or actual
payments are made.
Answer 7
False: Cash Basis of Accounting is the method of recording transactions by which revenues and costs and
assets and liabilities are reflected in the accounts in the period in which actual receipts or actual payments
are made.

Multiple Choice Questions

Question 1
All the following items are classified as fundamental accounting assumptions except
(a) Consistency.
(b) Business entity.
(c) Going concern.
Answer 1 : (b)

Question 2
Two primary qualitative characteristics of financial statements are
(a) Understandability and materiality.
(b) Relevance and reliability.
(c) Neutrality and understandability.
Answer 2 : (b)

Question 3
Kanika Enterprises follows the written down value method of depreciating machinery year after year
due to
(a) Comparability.
(b) Convenience.
(c) Consistency.
Answer 3 : (c)

Question 4
A purchased a car for ₹ 5,00,000, making a down payment of ₹ 1,00,000 and signing a ₹ 4,00,000 bill
payable due in 60 days. As a result of this transaction
(a) Total assets increased by ₹ 5,00,000.
(b) Total liabilities increased by ₹ 4,00,000.
(c) Total assets increased by ₹ 4,00,000 with corresponding increase in liabilities by ₹ 4,00,000.
Answer 4 : (c)

Question 5
Mohan purchased goods for ₹15,00,000 and sold 4/5th of the goods amounting ₹18,00,000 and met
expenses amounting ₹ 2,50,000 during the year, 2022. He counted net profit as ₹ 3,50,000. Which of the
accounting concept was followed by him?
(a) Entity.
(b) Periodicity.
(c) Matching.
Answer 5 : (c)

Question 6
A businessman purchased goods for ₹ 25,00,000 and sold 80% of such goods during the accounting year
ended 31st March, 2022. The market value of the remaining goods was ₹ 4,00,000. He valued the closing
Inventory at cost. He violated the concept of
(a) Money measurement.
(b) Conservatism.
(c) Cost.
Answer 6 : (b)
Chapter 1.2 Accounting Concepts, Principles and Conventions
 1.2-5

Question 7
Capital brought in by the proprietor is
(a) Increase in asset and increase in liability
(b) Increase in liability and decrease in asset
(c) Increase in asset and decrease in liability
Answer 7 : (a)

Question 8
During the life-time of an entity, accounting provides financial statements in accordance with which basic
accounting concept:
(a) Conservatism
(b) Matching
(c) Accounting period
Answer 8 : (c)

Question 9
A concept that a business enterprise will not be liquidated in the near future is known as :
(a) Going concern
(b) Economic entity
(c) Monetary unit
Answer 9 : (a)

Question 10
Assets are held in the business for the
(a) Resale.
(b) Conversion into cash
(c) Earning revenue.
Answer 10 : (c)

Question 11
Revenue from sale of products, is generally, realised in the period in which
(a) Cash is collected.
(b) Sale is made
(c) Products are manufactured.
Answer 11 : (b)

Question 12
The concept of conservatism when applied to the balance sheet results in
(a) Understatement of assets.
(b) Overstatement of assets.
(c) Overstatement of capital.
Answer 12 : (a)

Question 13
Decrease in the amount of trade payables results in
(a) Increase in cash.
(b) Decrease in bank over draft account.
(c) Decrease in assets.
Answer 13 : (c)

Question 14
The determination of expenses for an accounting period is based on the principle of
(a) Objectivity.
(b) Materiality.
(c) Matching.
Answer 14 : (c)

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Question 15
Economic life of an enterprise is split into the periodic interval to measure its performance is as per
(a) Entity.
(b) Matching.
(c) Periodicity.
Answer 15 : (c)

Question 16
If an individual asset is increased, there will be a corresponding
(a) Increase of another asset or increase of capital.
(b) Decrease of another asset or increase of liability.
(c) Decrease of specific liability or decrease of capital.
Answer 16 : (b)

Question 17
Purchase of machinery for cash
(a) Decreases total assets.
(b) Increases total assets.
(c) Retains total assets unchanged.
Answer 17 : (c)

Question 18
Consider the following data pertaining to Alpha Ltd.:
Particulars ₹
Cost of machinery purchased on 1st April, 2021 10,00,000
Installation charges 1,00,000
Market value as on 31st March, 2022 12,00,000
While finalizing the annual accounts, if the company values the machinery at ₹ 12,00,000. Which of the
following concepts is violated by the Alpha Ltd.?
(a) Cost.
(b) Matching.
(c) Accrual.
Answer 18 : (a)

Theoretical Questions & Answers

Question 1
Write short notes on:
(i) Fundamental accounting assumptions.
(ii) Periodicity concept.
(iii) Accounting conventions.
Answer 1
(i) Fundamental accounting assumptions: There are three fundamental accounting assumptions: Going
Concern; Consistency and Accrual. If nothing has been written about the fundamental accounting
assumption in the financial statements then it is assumed that they have already been followed in
their preparation of financial statements.
(ii) Periodicity concept: According to this concept accounts should be prepared after every period & not
at the end of the life of the entity.
This is also called the concept of definite accounting period. As per going concern’ concept an
indefinite life of the entity is assumed. For a business entityit causes inconvenience to measure
performance achieved by the entity in the ordinary course of business.
So, a small but workable fraction of time is chosen out of infinite life cycle of the business entity for
measuring performance and looking at the financial position. Generally, one year period is taken up
for performance measurement and appraisal of financial position. However, it may also be 6 months
or 9 months or 15 months.
According to this concept accounts should be prepared after every period & not at the end of the life

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of the entity. Usually, this period is one calendar year. We generally follow from 1st April of a year to
31st March of the immediately following year.
Thus, for performance appraisal it is not necessary to look into the revenue and expenses of an unduly
long time-frame. This concept makes the accounting system workable and the term ‘accrual’
meaningful. If one thinks of indefinite time-frame, nothing will accrue. There cannot be unpaid
expenses and non- receipt of revenue. Accrued expenses or accrued revenue is only with reference to
a finite time-frame which is called accounting period.
Thus, the periodicity concept facilitates in:
(i) Comparing of financial statements of different periods
(ii) Uniform and consistent accounting treatment for ascertaining the profit and assets of the
business
(iii) Matching periodic revenues with expenses for getting correct results of thebusiness operations
(iii) Accounting conventions: Accounting conventions emerge out of accounting practices, commonly
known as accounting principles, adopted by various organizations over a period of time. For details,
Accounting conventions emerge out of accounting practices, commonly known as accounting
principles, adopted by various organizations over a period of time. These conventions are derived by
usage and practice. The accountancy bodies of the world may change any of the convention to
improve the quality of accounting information. Accounting conventions need not have universal
application.
In the study material, the terms ‘accounting concepts’, ‘accounting principles’ and ‘accounting
conventions’ have been used interchangeably to mean those basic points of agreement on which
financial accounting theory and practice are founded

Question 2
Briefly explain the qualitative characteristics of the financial statements.
Answer 2
Qualitative characteristics are the attributes that make the information provided in financial statements
useful to users.
1. Understandability: An essential quality of the information provided in financial statements is that it must
be readily understandable by users. For this purpose, it is assumed that users have a reasonable knowledge
of business, economic activities and accounting and study the information with reasonable diligence.
Information about complex matters that should be included in the financial statements because of its
relevance to the economic decision-making needs of users should not be excluded merely on the ground
that it may be too difficult for certain users to understand.
2. Relevance: To be useful, information must be relevant to the decision-making needsof users. Information
has the quality of relevance when it influences the economic decisions of users by helping them evaluate
past, present or future events or confirming, or correcting, their past evaluations.
3. Reliability: To be useful, information must also be reliable, Information has the qualityof reliability when it
is free from material error and bias and can be depended upon by users to represent faithfully that which it
either purports to represent or could reasonably be expected to represent.
4. Comparability: Users must be able to compare the financial statements of an enterprise through time in
order to identify trends in its financial position, performance and cash flows. Users must also be able to
compare the financial statements of different enterprises in order to evaluate their relative financial
position, performance and cash flows. Hence, the measurement and display of the financial effects of like
transactions and other events must be carried out in a consistent way throughout an enterprise and over
time for that enterprise and in a consistent way for different enterprises.
5. Materiality: The relevance of information is affected by its materiality. Information is material if its
misstatement (i.e., omission or erroneous statement) could influence the economic decisions of users
taken on the basis of the financial information. Materiality depends on the size and nature of the item or
error, judged in the particular circumstances of its misstatement. Materiality provides a threshold or cut-
off point rather than being a primary qualitative characteristic which the information must haveif it is
to be useful.
6. Faithful Representation: To be reliable, information must represent faithfully the transactions and other
events it either purports to represent or could reasonably be expected to represent. Thus, for example, a
balance sheet should represent faithfully the transactions and other events that result in assets, liabilities
and equity of the enterprise at the reporting date which meet the recognition criteria.

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7. Substance over Form: If information is to represent faithfully the transactions and otherevents that it
purports to represent, it is necessary that they are accounted for and presented in accordance with their
substance and economic reality and not merelytheir legal form. The substance of transactions or other
events is not always consistent with that which is apparent from their legal or contrived form. For
example, where rights and beneficial interest in an immovable property are transferred but the
documentations and legal formalities are pending, the recording of acquisition/disposal (by the
transferee and transferor respectively) would in substance represent the transaction entered into.
8. Neutrality: To be reliable, the information contained in financial statements must be neutral, that is, free
from bias. Financial statements are not neutral if, by the selectionor presentation of information, they
influence the making of a decision or judgementin order to achieve a predetermined result or outcome.
9. Prudence: The preparers of financial statements have to contend with the uncertainties that inevitably
surround many events and circumstances, such as the collectability of receivables, the probable useful life
of plant and machinery, and the warranty claims that may occur. Such uncertainties are recognised by the
disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial
statements. Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in
making the estimates required under conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated. However, the exercise of prudence does not
allow, for example, the creation of hidden reserves or excessive provisions, the deliberate understatement
of assets or income, or the deliberate overstatement of liabilities or expenses, because the financial
statements would then not be neutral and, therefore, not have the quality of reliability.
10. Full, fair and adequate disclosure: The financial statement must disclose all the reliableand relevant
information about the business enterprise to the management and also to their external users for which
they are meant, which in turn will help them to take a reasonable and rational decision. For it, it is necessary
that financial statements are prepared in conformity with generally accepted accounting principles i.e the
information is accounted for and presented in accordance with its substance and economic reality and not
merely with its legal form. The disclosure should be full and final so that users can correctly assess the
financial position of the enterprise.
11. Completeness: To be reliable, the information in financial statements must be complete within the
bounds of materiality and cost. An omission can cause information to be false or misleading and thus
unreliable and deficient in terms of its relevance.

Section B: RTP, MTP & PYP Questions

True & False Questions

Question 1
The financial statement must disclose all the relevant and reliable information in accordance with the
Full Disclosure Principle. (RTP Nov’22)
Answer 1
True: The financial statement must disclose all the relevant and reliable information in accordance with
the Full Disclosure Principle.

Question 2
A concern proposes to discontinue its business from December 2023 and decides to dispose off all its
plants within a period of 3 months. The Balance Sheet as on 31st December, 2023 should continue to
indicate the plants at its historical costs as the assets will be disposed off after the Balance Sheet date.
(RTP Jun’24)
Answer 2
False: If the fundamental accounting assumption of going concern is not followed, then the assets and
liabilities should be stated at realizable value not historical cost.

Question 3
State with reasons, whether the following statements are true or false:
The concepts of conservatism when applied to the Balance Sheet results in understatement of assets.
(MTP 2 Marks, Apr’23)

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Answer 3
True: Conservatism states that the accountant / entity should not anticipate any future income. However,
they should provide for all possible / probable losses. Imprudent use of concept of conservatism may lead
to understatement of Income and Assets.

Question 4
Accrual concept implies accounting on cash basis. .(MTP 2 Marks, Nov’22 & Nov’23)
Answer 4
False: Accrual concept implies accounting on ‘due’ or ‘accrual’ basis. Accrual basis of accounting involves
recognition of revenues and costs as and when they accrue irrespective of actual receipts or payments.

Question 5
The financial statements are not prepared on the assumption that an enterprise is a going concern and
will continue its operation for the foreseeable future. (PYP 2 Marks, Nov’22)
Answer 5
False: The financial statements are normally prepared on the assumption that an enterprise is a going
concern and will continue in operation for the foreseeable future.

Question 6
The provision for discount on creditors is often not provided in keeping with the principle of
conservatism. (PYP 2 Marks, Nov’22)
Answer 6
True: According to the principle of conservatism provision is maintained for the losses to be incurred in
future. Discount on creditors is an income so provision in not maintained.

Question 7
State with reasons, whether the following statements are True or False:
As per concept of conservatism the accountant should provide for all possible losses but should not
anticipate income. (PYP 2 Marks, Jun’23)
Answer 7
True: Conservatism states that the accountant should not anticipate any future income, however they
should provide for all possible losses.

Question 8
State with reasons, whether the following statements are True or False:
The financial statement must disclose all the relevant and reliable information in accordance with the
full disclosure principle. (PYP 2 Marks, Dec’23, MTP 2 Marks, May’24)
Answer 8
True: The financial statement must disclose all the reliable and relevant information about the business
enterprise to the management and also to their external users for which they are meant, which in turn will
help them to take a reasonable and rational decision. The disclosure should be full and final as per AS – 1,
so that users can correctly assess the financial position of the enterprise.

Question and Answer

Question 1
Explain Cash and Mercantile system of accounting. (RTP Nov’22, MTP 4 Marks, May’22, Nov’23)
Answer 1
Cash and mercantile system: Cash system of accounting is a system by which a transaction is recognized
only if cash is received or paid. In cash system of accounting, entries are made only when cash is received
or paid, no entry being made when a payment or receipt is merely due. Cash system is normally followed
by professionals, educational institutions or non-profit making organizations.
On the other hand, mercantile system of accounting is a system of classifying and summarizing transactions
into assets, liabilities, equity (owner’s fund), costs, revenues and recording thereof. A transaction is
recognized when either a liability is created/ impaired and an asset is created /impaired. A record is made
on the basis of amounts having become due for payment or receipt irrespective of the fact whether
payment is made or received actually.
Mercantile system of accounting is generally accepted accounting system by business entities.
Chapter 1.2 Accounting Concepts, Principles and Conventions
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Question 2
Write short notes on Going Concern concept. (RTP Nov’22)
Answer 2
Going Concern concept: The financial statements are normally prepared on the assumption that an
enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed
that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its
operations; if such an intention or need exists, the financial statements may have to be prepared on a
different basis and, if so, the basis used is disclosed.

Question 3
Distinguish between Going concern and cost concept. (RTP May’23, SM)
Answer 3
Going Concern concept: The financial statements are normally prepared on the assumption that an
enterprise is a going concern and will continue its operation for the foreseeable future. Hence, it is assumed
that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its
operations; if such an intention or need exists, it should be disclosed in the financial statements.
Cost concept: It means that the value of an asset is to be determined on the basis of historical cost, in other
words, acquisition cost. Although there are various measurement bases, accountants traditionally prefer
this concept in the interests of objectivity.

Question 4
Distinguish between money measurement concept and matching concept. (RTP Dec’23, SM)
Answer 4
Distinction between Money measurement concept and matching concept
As per Money Measurement concept, only those transactions, which can be measured in terms of money
are recorded. Since money is the medium of exchange and the standard of economic value, this concept
requires that those transactions alone that are capable of being measured in terms of money should be
recorded in the books of accounts. Transactions and events that cannot be expressed in terms of money
are not recorded in the business books.
In Matching concept, all expenses matched with the revenue of that period should only be taken into
consideration. In the financial statements of the organization if any revenue is recognized then expenses
related to earn that revenue should also be recognized.

Question 5
Write short notes on the following:
Accounting conventions. (RTP Dec’23, May’23)
Answer 5
Accounting conventions emerge out of accounting practices, commonly known as accounting principles,
adopted by various organizations over a period of time. These conventions are derived by usage and
practice. The accountancy bodies of the world may change any of the convention to improve the quality
of accounting information. Accounting conventions need not have universal application.

Question 6
Write short notes on the following:
Fundamental Accounting Assumptions. (RTP Jun’24, Dec’23)
Answer 6
Fundamental Accounting Assumptions: Fundamental accounting assumptions underlie the preparation
and presentation of financial statements. They are usually not specifically stated because their acceptance
and use are assumed. Disclosure is necessary if they are not followed. The Institute of Chartered
Accountants of India issued Accounting Standard (AS) 1 on ‘Disclosure of Accounting Policies’ according to
which the following have been generally accepted as fundamental accounting assumptions:
1. Going concern: The enterprise is normally viewed as a going concern, i.e. as continuing operations
for the foreseeable future. It is assumed that the enterprise has neither the intention nor the
necessity of liquidation or of curtailing materially the scale of the operations.

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2. Consistency: It is assumed that accounting policies are consistent from one period to another.
3. Accrual: Guidance Note on ‘Terms used in Financial Statements’ defines accrual basis of accounting
as “the method of recording transactions by which revenue, costs, assets and liabilities are reflected
in the accounts in the period in which they accrue.” The accrual ‘basis of accounting’ includes
considerations relating to deferrals, allocations, depreciation and amortisation. Financial statements
prepared on the accrual basis inform users not only of past events involving the payment and receipt
of cash but also of obligations to pay cash in future and of resources that represent cash to be
received in the future. Hence, they provide the type of information about past transactions and other
events that is most useful to users in making economic decisions. Accrual basis is also referred to as
mercantile basis of accounting.

Question 7
Explain the followings:
Accrual Basis of Accounting (PYP 1 Marks, Dec’21)
Answer 7
Accrual Basis of Accounting
The method of recording transactions by which revenues, costs, assets and liabilities are reflected in the
accounts in the period in which they accrue.

Question 8
Briefly explain the following Concepts of Accounting:
• Money Measurement Concept
• Periodicity Concept. (PYP 4 Marks, May’22)
Answer 8
Money Measurement concept: As per this concept, only those transactions, which can be measured in
terms of money are recorded. Since money is the medium of exchange and the standard of economic
value, this concept requires that those transactions alone that are capable of being measured in terms
of money be only to be recorded in the books of accounts. Transactions and events that cannot be
expressed in terms of money are not recorded in the business books.
Periodicity concept: According to this concept, accounts should be prepared after every period not
at the end of the life of the entity. This is also called the concept of definite accounting period. Usually,
this period is one accounting year. We generally follow from 1st April of a year to 31st March of the
immediately following year.

Question 9
Briefly explain the following term- Materiality (PYP 1 Marks, Jun’23)
Answer 9
Materiality refers to all relatively important and relevant items, i.e., items the knowledge of which might
influence the decisions of the user of the financial statements are disclosed in the financial statements.

Question 10
Briefly explain the following term- Conservatism (PYP 1 Marks, Jun’23)
Answer 10
Conservatism states that the accountant should not anticipate any future income however they should
provide for all possible losses. When there are many alternative values of an asset, an accountant should
choose the method which leads to the lesser value.

Question 11
Briefly explain the following term- Money Measurement Concept (PYP 1 Marks, Dec’23)
Answer 11
Money measurement concept: As per this concept, only those transactions, which can be measured in
terms of money are recorded. Transactions, even if, they affect the results of the business materially, are
not recorded if they are not convertible in monetary terms.

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Question 12
Briefly explain the following term- Realisation Concept (PYP 1 Marks, Dec’23)
Answer 12
Realisation concept: It closely follows the cost concept. Any change in value of an asset is to be recorded
only when the business realises it.

Chapter 1.2 Accounting Concepts, Principles and Conventions