FINANCIAL ACCOUNT
THEORY BASE OF ACCOUNTING,ACCOUNTING STANDARDS AND INDIAN ACCOUNTING STANDARDS (IND-AS)
Very Short Answer Type Questions:-
Q.1. What do you understand by Accounting Concepts?
Ans. Accounting concepts are the basic assumptions or fundamental propositions within
which accounting function is carried out.
Q.2. Explain Dual Aspect Concept.
Ans. Every transaction has two aspects a debit and a credit of equal amount. It means for
debit there is a credit of equal amount in one or more accounts and vice versa. According
to Dual Aspect Concept, both the aspects are recorded in the books of account.
Q.3. Explain Business Entity Concept.
Ans. According to the Business Entity Concept, proprietor of the business is a separate and
distinct entity from business. The transactions are recorded in the books of account from
the point of view of business, not from the point of view of the proprietor.
Q.4. Explain Going Concern Concept.
Ans. According to the Going Concern Concept, it is assumed that the business will continue
for a foreseeable future and there is no intention to close or scale down the operations
significantly.
Q.5. Explain Revenue Recognition Concept.
Ans. According to the Revenue Recognition Concept, revenue is considered to have been
realized when a transaction has been entered into and the obligation to receive the
amount has been established.
Q.6. Explain Verifiable Objective Concept.
Ans. According to the Verifiable Objective Concept, accounting should be free from personal
bias. Measurements that are based on verifiable evidences are regarded as objective.
Q.7. Explain Historical Cost Concept.
(Delhi 1999)
Ans. According to the Historical Cost Concept assets are recorded in the books of account at the
prices paid to acquire them and it is the basis for all subsequent accounting of the assets.
Q. 8. Explain Accounting Period Concept.
Ans. According to the Accounting Period Concept, life of the business is broken into smaller
periods (one year) so that its performance is measured at regular intervals.
Q. 9. Explain Consistency Convention?
Ans. According to the Consistency Convention, accounting practices once selected and adopted should be applied consistently year after year.
Q. 10. Explain Money Measurement Concept?
Ans. According to the Money Measurement Concept, transactions and events that can be
measured in terms of money are recorded in the books of account.
Q. 11. Explain Accrual Concept?
Ans. According to the Accrual Concept, a transaction is recorded in the books of account all
the time when it is entered into and not when the settlement takes place. For example,
sales made on credit will be recorded in the books of account on the date of sales, not
when the amount is received.
Q. 12. Explain Principle of Matching Revenue with Cost?
Ans. According to the Matching Concept, cost incurred to earn revenue should be recognized
as expense in the period when revenue is recognized as earned.
Q. 13. Why is it necessary for accountants to assume theta business entity will remain a going concern?
Ans. Going Concern Concept is a fundamental accounting concept. It is because of this
concept, distinction is made between capital and revenue expenditures and thus assets
and liabilities are recognized.
Q. 14. How does the Matching Principle apply to depreciation?
Ans. According to the Matching Principle, the expenses for an accounting period are matched
against related revenues for the determination of profit. On account of this principle,
the purchase price of the fixed asset is not taken but only depreciation on fixed asset
related to the accounting period is taken.
Q.15. Why should a business follow the consistency principle?
Ans. Comparability is a qualitative characteristic of a financial statement, i.e., the financial
performance of a year may be compared with that of another year. It is possible only
when accounting practices are consistently followed.
Q. 16. Explain any three of the following accounting conventions:
(i) Full Disclosure,
(ii) Consistency,
(iii) Immateriality and
(iv) Conservatism.
Ans. (i) According to the Convention of Full Disclosure, all significant information relating
to the economic affairs of the entity should be reported in the financial statements
in an understandable manner.
(ii) According to the Convention of Consistency, accounting practices once selected and
adopted should be consistently applied year after year.
(iii) According to the Convention of Immateriality, a transaction should be reported in the
financial statements on the basis of its materialist. An item is material if it can
influence the decision of the user.
(iv) According to the Convention of Conservatism, anticipated losses should be
accounted while anticipated incomes should not be accounted.
Q.17. Give the meaning of Full Disclosure Principle' of Accounting.
Ans. According to the Convention of Full Disclosure, all significant information relating to
the economic affairs of the entity should be reported in the financial statements in a
understandable manner.
Q.18. Explain Accounting Standards briefly?
Ans. Accounting Standards are a set of guidelines, i.e., Generally Accepted Accounted
pies, issued by the accounting body of the country, i.e., The Institute of India, that are followed for preparation and presentation of financial statements.The objective of setting Accounting Standards is to bring uniformity in accounting practice and to ensure transparency, consistency comparability.
Q.19. What is the main objective of setting accounting standards?
OR
What is meant by Accounting Standards? Explain one objective of Accounting Standards?
Ans. Accounting Standards are the guidelines for the preparation and presentation of Financial Statements. The objective of setting Accounting Standards is to bring uniformity in accounting practices and to ensure transparency, consistency and comparability.
Q.20. 'Accounting Standards have been evolved to improve the reliability and credibility of Financial Statements. Accounting Standards provide the solution in case of conflicts among various groups.' In the light of this statement, enumerate the objectives of Accounting Standards?
Ans. Objectives of Accounting Standards are:
(i) Minimize the diverse accounting policies and practices with the aim to eliminate them to the extent possible.
(ii) Promote better understanding of financial statements.
(iii) Understand significant Account Policies adopted and applied.
(iv) Facilitating meaningful comparison of financial statements of two or more entities.
(v) Enhancing reliability of financial statements.
Q.21. Briefly explain your understanding of IFRS ?
Ans. IFRS are the accounting standards issued by the IASB, recommended to be used by the enterprises globally to produce financial statements following a single set of accounting standards. IFRS are principle based accounting standards in comparison to rule based Indian Accounting Standards. Also they are based on fair value concept.
Q.22 Which financial statements are prepared under IFRS?
Ans. Financial Statements prepared under IFRS include:
(i) Statement of Financial Position;
(ii) Statement of Comprehensive Income;
(iii) Statement of Changes in Equity;
(iv) Statement of Cash Flow; and
(v) Notes and Significant Accounting Policies.
Q.23 Briefly explain the elements of Statement of Financial Position?
Ans. Assets: Assets are the resources controlled by the enterprise as a result of past events and operations from which the future economic benefits shall flow to the enterprise. Thus, assets shall include tangible and intangible assets, which an enterprise owns.
Liabilities: Liabilities are the obligations of of the enterprise from the past events and operations, which shall result in outflow of resources, u.e., assets.
Equity: Equity is the difference between the assets and liabilities.
Q.24. Briefly explain the elements of Statement of Comprises Income?
Ans. A Statement of Comprehensive Income comprises of two statements, i.e., Income Statement and a Statement of Comprehensive Income are prepared. The Statement of Comprehensive Income reconciles the income or loss as per Income Statement with total comprehensive income. The elements or contents of the statement are:
(i) Revenue: It increases the economic benefit during the accounting period because of business operations and/or increase in the value of assets or decrease in liabilities. As a result of it, value of shareholders equity increases.
(ii) Expense: It is a decrease in economic benefits in the form of outflows during the accounting period because of business operations and/ decrease in the value of assents or increase in liabilities. As a result of it, value of shareholders equity decreases.
Q.25. Briefly explain your understanding of Ind-AS?
Ans. Ind-AS are the accounting standards issued by the Ministry of Corporate Affairs, Government of Indian, and notified under the Companies Act, 2013 prescribed to be used by the enterprises to prepare financial statements. They are principle based accounting standards in comparison to rule based Accounting Standards. Also they are based on fair value concept.
Q.26. Which financial statements are prepared under Ind-AS?
Ans. Financial Statements prepared under Ind-AS include:
(i) Statement of Financial Position;
(ii) Statement of Comprehensive Income;
(iii) Statement of Changes in Equity;
(iv) Statement of Cash Flow; and
(v) Notes and Significant Accounting Policies.
Q.27. Briefly explain the elements of Statement of Comprises Income?
Ans. A Statement of Comprehensive Income comprises of two statements, i.e., Income Statement and a Statement of Comprehensive Income are prepared. The Statement of Comprehensive Income reconciles the income or loss as per Income Statement with total comprehensive income. The elements or contents of the statement are:
(i) Revenue: It increases the economic benefit during the accounting period because of business operations and/or increase in the value of assets or decrease in liabilities. As a result of it, value of shareholders equity increases.
(ii) Expense: It is a decrease in economic benefits in the form of outflows during the accounting period because of business operations and/ decrease in the value of assents or increase in liabilities. As a result of it, value of shareholders equity decreases.
Multiple Choice Questions (MCQs)
1. Select the best alternative:
(i) According to the Business Entity Concept
(a) Transactions between the business and its owners are not recorded.
(b) Transactions between the business and its owners are recorded considering considering them to be one single entity.
(c) Transactions between the business and its owners are recorded from the business point of view.
(d) None of the above.
(ii) According to the Money Measurement Concept
(a) all transactions and events are recorded.
(b) all transactions and events which can be estimated in money terms are recorded in the books of account.
(c) all transactions and events which can be measured in money terms are recorded in the books of account.
(d) None of the above
(iii) According to the Cost Concept
(a) assets are recorded at the value paid for acquiring them.
(b) assets are recorded by estimating the market value at the time of purchase.
(c) assets are recorded at lower of cost or market value.
(d) None of the above.
(iv) According to the Going Concept
(a) assets are recorded at cost and are depreciated over their useful life.
(b) assets are valued at their market value at the year-end and are recorded in the books of account.
(c) assets are valued at their market value, recorded in the books and depreciation is charged on the market value.
(d) None of the above.
(v) According to the Accrual Concept
(a) Transactions and events are recorded in the books at the time of their settlement in cash.
(b) Transactions and events are recorded in the books at the time when they are entered into.
(c) Transactions and events may be recorded either at the time of the settlement or when they are entered into.
(d) None of the above.
(vi) According to the Convention of Consistency
(a) accounting policies and practices once adopted should be consistently followed.
(b) accounting policies and practices adopted may be changed as per the management's
decision.
(c) accounting policies and practices once adopted cannot be changed under any circumstances.
(d) None of the above.
(vii) According to Going Concern Concept, a business is viewed as having
(a) a limited life.
(b) a very long life.
(c) an indefinite life.
(d) None of these.
(viii) According to which of the following accounting concepts, even the proprietor of a business is treated as creditor to the extent of his capital?
(a) Money Measurement Concept
(b) Dual Aspect Concept
(c) Cost Concept
(d) Business Entity Concept
(ix) According to which of the following concepts, in determining the net income from business, all costs which are applicable to the revenue of the period should be charged against that revenue?
(a) Matching Concept
(b) Money Measurement Concept
(c) Cost Concept
(d) Dual Aspect Concept
(x) Valuation of stock at lower of cost or net realizable value is an example of
(a) Consistency Convention.
(b) Conservatism Convention.
(c) Realization Concept.
(d) Matching Concept.
(xi) During the life-time of an entity, accounting produces financial statements in accordance with which of the following accounting concept?
(a) Matching
(b) Conservatism
(c) Accounting period
(d) Cost
(xii) X Ltd. follows the Written Down Value Method of depreciating machinery year after year due to
(a) comparability.
(b) convenience.
(c) consistency.
(d) All of these.
(xiii) The Convention of Conservatism takes into account
(a) all prospective profits and prospective losses.
(b) all prospective profits and leaves out prospective losses.
(c) all prospective losses but leaves out prospective profits.
(d) None of the above.
(xiv) IASB upon coming into existence has adopted
(a) all IAS and SIC.
(b) some IAS and SIC.
(c) none of the IAS and SIC.
(d) None of these.
(xv) IFRS are
(a) rule based accounting standards.
(b) principle based accounting standards.
(c) partially rule based and partially principle based accounting standards.
(d) None of the above.
(xvi) IFRS are based on
(a) historical cost.
(b) fair value.
(c) both historical cost and fair value.
(d) None of these.
(xvii) Ind-AS are
(a) rule based accounting standards.
(b) principle based accounting standards.
(c) partially rule based and partially principle based accounting standards.
(d) None of the above.
(xviii) Assets (except Securities) may be valued under Ind-AS on.
(a) historical cost.
(b) fair value.
(c) both historical cost and fair value.
(d) None of these.
[(i) (c); (ii) (c); (iii) (a); (iv) (a); (v) (b); (vi) (a); (vii) (c); (viii) (d); (ix) (a); (x) (b); (xi) (c); (xii) (c); (xiii) (c); (xiv) (a); (xv) (b); (xvi) (b); (xvii) (b); (xviii) (a).]
 chapter 3 (class 11) solution and PDF){kind=link}
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