FINANCIAL ACCOUNT
BASES OF ACCOUNTING
Multiple Choice Questions (MCQs)
Select the correct alternative:
(i) Under the Cash Basis of Accounting, expenses are recorded
(a) on payment.
(b) on being incurred.
(c) either (a) or (b).
(d) None of these.
(ii) Under the Accrual Basis of Accounting, expenses are recorded
(a) on payment.
(b)being incurred.
(c) either (a) or (b).
Very Short Answer Type Questions
Q.1. What are the two bases of accounting?
Ans. There are two bases of accounting:
(i) Cash Basis and
(ii) Accrual Basis.
Q.2. What do you understand by Cash Basis of Accounting?
Ans. Cash Basis of Accounting means that the entry is recorded on receipt or payment of cash.The system does not distinguish between capital and revenue items. It also does not recognize prepaid expenses and outstanding expenses.
Q.3 What do you understand by Accrual Basis of Accounting?
Ans. Accrual Basis of Accounting means the transaction is recorded at the time when it is entered into and not when the settlement takes place. In other words, under Accrual Basis of Accounting entries are recorded when incomes are earned and expenses are incurred irrespective of cash received or paid.
Q.4. Distinguish between Cash Basis and Accrual Basis of Accounting. (Two Points)
Ans. (i) Both cash and credit transactions are recorded under the Accrual System of Accounting. Under the Cash System of Accounting only cash transactions are recorded.
(ii) Capital and revenue items are distinguished under the Accrual System of Accounting.Under the Cash System of Accounting no such distinction is made.
Q.5. What are the advantages of Cash Basis of Accounting? (Two Points)
Ans. Advantages of Cash Basis of Accounting are:
(i) It is a simple system as adjustments are not required.
(ii) It is more objective as very few estimates and judgments are made.
Q.6. What are the disadvantages of Cash Basis of Accounting?(Two Points)
Ans. Disadvantages of Cash Basis of Accounting are:
(i) It is does not give a true and fair view of profit or loss and the financial position.
(ii) It does not follow the Matching Principle.
Q.7. Does cash basis of accounting violates GAAP ? If Yes, how?
Ans. Yes, cash basis of accounting violates GAAP as it does not follow matching principle and accrual concept.
Q.8. What are the advantages of Accrual Basis of Accounting?(Two Points)
Ans. Advantages of accrual Basis of Accounting are:
(i) It gives a true and fair view of profit or loss and the financial position.
(ii) It shows complete picture of financial transactions as it accounts prepaid and outstanding expenses, earned and unearned incomes, assets and liabilities.
Q.9. What are the disadvantages of Accrual Basis of Accounting?(Two Points)
Ans. Disadvantages of accrual Basis of Accounting are:
(i) The accounting process is more elaborate.
(ii) It is more complicated than Cash Basis of Accounting and requires adequate skills.
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