Chapter theory-base-of-accounting: Theory Base of Accounting Case Study Questions | accountancy Class 11 CBSE

Chapter theory-base-of-accounting: Theory Base of Accounting Case Study Questions | accountancy Class 11 CBSE | ByteNotes.in

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Case Set 1

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Ramesh started a small grocery business and invested ₹2,00,000 of his personal savings as capital. He also brought his personal laptop worth ₹40,000 to the shop for business use. His accountant, Mr. Sharma, recorded the laptop as a business asset and the ₹2,00,000 as a liability of the business toward Ramesh. Later, Ramesh withdrew ₹10,000 from the business for his household expenses. Mr. Sharma recorded this withdrawal as drawings and reduced Ramesh's capital accordingly. A bank officer reviewing the books asked why Ramesh's personal car loan of ₹80,000 was not shown as a business liability. Mr. Sharma explained the accounting concept that guided his treatment of these transactions.

Question 1: Which accounting concept did Mr. Sharma apply when he did not include Ramesh's personal car loan in the business books?

The Business Entity Concept was applied.
This concept states that the business and its owner are two separate entities; personal liabilities of the owner are not recorded in business books.

Question 2: Why did Mr. Sharma record the ₹2,00,000 invested by Ramesh as a liability of the business?

Under the Business Entity Concept, the business and owner are treated as separate entities.
From the business's perspective, the owner is a creditor; hence capital invested is shown as a liability (owner's equity) of the business.

Question 3: Evaluate how the Business Entity Concept affects the recording of three different transactions mentioned in the passage: investment of capital, use of personal laptop, and withdrawal of ₹10,000.

Capital of ₹2,00,000 is recorded as a liability (capital account) of the business toward the owner, as the owner and business are separate entities.
The personal laptop brought by Ramesh for business use is recorded as a business asset because it is now used by the business entity.
The withdrawal of ₹10,000 is recorded as drawings, reducing the owner's capital — it represents outflow of business funds to the owner as a separate entity.

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Case Set 2

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Sunrise Machines Ltd purchased a factory building in 2010 for ₹50 lakh. By 2024, the market value of the building had risen to ₹2 crore. The finance manager wanted to show the building at ₹2 crore in the balance sheet to reflect its true value. However, the auditor objected and insisted it should continue to be shown at ₹50 lakh. Additionally, the company spent ₹5 lakh on transportation and ₹2 lakh on installation of a new machine costing ₹80 lakh. The accountant recorded the machine at ₹87 lakh in the books. A newly appointed junior accountant questioned why the rising market value of assets was being ignored in the books.

Question 1: Which accounting concept supports the auditor's insistence on recording the building at ₹50 lakh instead of its current market value of ₹2 crore?

The Cost Concept (Historical Cost Concept) supports this treatment.
It requires that assets be recorded at their purchase price, which does not change year after year, ensuring objectivity and verifiability.

Question 2: How did the accountant correctly arrive at ₹87 lakh as the recorded value of the new machine?

Under the Cost Concept, all assets are recorded at total cost of acquisition, which includes purchase price, transportation, and installation charges.
Cost = ₹80 lakh (purchase) + ₹5 lakh (transport) + ₹2 lakh (installation) = ₹87 lakh.

Question 3: Explain the advantages and one significant limitation of using historical cost for recording assets, with reference to the scenario above.

Advantage 1: Historical cost is objective and verifiable from purchase documents such as invoices and receipts.
Advantage 2: It ensures comparability across periods since the recorded value does not change arbitrarily.
Limitation: Historical cost does not reflect the true worth of the business; during rising prices (as in this case, building worth ₹2 crore shown at ₹50 lakh), it leads to hidden profits and understated asset values.

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Case Set 3

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Priya Enterprises purchased a heavy-duty printing machine for ₹5,00,000 in April 2022, with an estimated useful life of 5 years. The accountant charged the entire ₹5,00,000 as an expense in the profit and loss account for 2022–23. Meanwhile, salaries of ₹60,000 due in March 2023 were not paid until April 2023. The accountant excluded them from the 2022–23 accounts, claiming payment hadn't been made yet. Similarly, insurance premium of ₹12,000 was paid for the full year April 2022–March 2023 and was fully charged to 2022–23 accounts. An external auditor pointed out two errors in the accounting treatment.

Question 1: Which accounting concept was violated when the entire cost of the printing machine was charged as an expense in one year?

The Matching Concept and Going Concern Concept were violated.
Only the portion of the asset consumed in earning revenue for the year should be charged; the remaining cost should be carried forward over the asset's useful life (₹1,00,000 per year as depreciation).

Question 2: Was the accountant correct in excluding the March 2023 salaries from 2022–23 accounts? Which concept governs this treatment?

No, the accountant was incorrect.
Under the Matching Concept and Accrual Basis of Accounting, expenses are recognised in the period to which they relate, not when cash is paid. March 2023 salaries must be shown as outstanding in 2022–23 accounts.

Question 3: Critically evaluate all three accounting treatments in the passage using relevant accounting concepts, and state the correct treatment for each.

Machine: Violates Going Concern and Matching concepts. Correct treatment — charge ₹1,00,000 (1/5th) as depreciation per year; carry forward ₹4,00,000 to future years.
Salaries: Violates Matching Concept and Accrual Basis. Correct treatment — ₹60,000 must be shown as outstanding salary in 2022–23 books since it relates to that period.
Insurance: Correctly treated; the full premium of ₹12,000 covers April 2022–March 2023, which matches the accounting period exactly, so full charge is appropriate.

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Case Set 4

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Deepak & Sons, a mid-sized trading firm, changed its method of inventory valuation from FIFO to Weighted Average in 2023–24. They also switched from the Straight Line Method to Written Down Value Method for depreciation, without disclosing these changes in the financial statements. A financial analyst trying to compare the firm's profits over the last three years found the figures misleading and incomparable. Additionally, when a competitor firm was also analysed, the analyst discovered that the competitor used the same accounting methods throughout all years, making comparison between the two firms impossible for 2023–24.

Question 1: Which accounting concept was violated by Deepak & Sons when they changed accounting methods without disclosure?

The Consistency Concept was violated.
This concept requires that accounting policies and practices must be uniform and consistent over periods; any necessary changes must be fully disclosed in financial statements along with their probable effects.

Question 2: Does the Consistency Concept mean that accounting methods can never be changed? Explain.

No, the Consistency Concept does not prohibit changes in accounting policies.
Changes can be made when necessary, but they must be fully disclosed in financial statements along with their probable effects on the financial results, so that users can adjust comparisons accordingly.

Question 3: Explain how the Consistency Concept aids both inter-period and inter-firm comparisons and why the analyst faced difficulty in both types of comparison in this case.

Inter-period comparison requires the same firm to use consistent methods across years. Deepak & Sons changed both inventory valuation and depreciation methods, making year-on-year profit comparisons unreliable.
Inter-firm comparison requires two enterprises to use similar accounting methods for the comparison period. Since Deepak & Sons changed methods while the competitor remained consistent, the 2023–24 figures are not comparable between firms.
Consistency eliminates personal bias and is the foundation of meaningful financial analysis; without it, reported profits may increase or decrease due to method change rather than actual business performance.

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Case Set 5

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Meena Textiles Ltd is preparing its annual financial statements. The closing stock of cotton yarn is valued at ₹8 lakh (cost price), though its current market value is ₹11 lakh. The company has also received an order for goods worth ₹15 lakh, which has not been recorded as revenue. A court case is pending against the company for supply of defective goods; the estimated liability is ₹2 lakh, and the company's accountant has made a provision for this in the books. A new junior accountant questioned why potential gains from the rising market price of stock were not recorded while the possible loss from the court case was being provided for.

Question 1: Which accounting concept explains why closing stock is valued at ₹8 lakh (cost) and not ₹11 lakh (market value)?

The Conservatism (Prudence) Concept explains this treatment.
It requires that closing stock be valued at cost or market value, whichever is lower. Since cost (₹8 lakh) is lower than market value (₹11 lakh), stock is recorded at ₹8 lakh to avoid overstating profits.

Question 2: Why was the sales order of ₹15 lakh not recorded as revenue? Which concept applies?

The Revenue Recognition (Realisation) Concept applies.
Revenue is recognised only when a legal right to receive it arises, i.e., when goods are delivered or service is rendered. A mere order does not constitute a completed sale, so it cannot be recorded as revenue.

Question 3: Explain the logic behind recording a provision for the court liability but not the gain from rising stock prices, in the context of Conservatism Concept. What is the risk of excessive conservatism?

Conservatism requires that all anticipated losses, even those with remote possibility, be provided for — hence, the estimated ₹2 lakh court liability is correctly provisioned.
Unrealised gains (rise in market value of stock) are not recorded until actually realised through sale — this prevents overstating profits and protects creditors from distribution of non-existent gains.
Risk of excessive conservatism: Deliberate understatement of asset values creates secret (hidden) reserves, which distort the true financial picture and can mislead investors and other users of financial statements.

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Chapter theory-base-of-accounting: Theory Base of Accounting | Case Study Questions

Passage

Question 1: Which accounting concept did Mr. Sharma apply when he did not include Ramesh's personal car loan in the business books?

Question 2: Why did Mr. Sharma record the ₹2,00,000 invested by Ramesh as a liability of the business?

Question 3: Evaluate how the Business Entity Concept affects the recording of three different transactions mentioned in the passage: investment of capital, use of personal laptop, and withdrawal of ₹10,000.

Passage

Question 1: Which accounting concept supports the auditor's insistence on recording the building at ₹50 lakh instead of its current market value of ₹2 crore?

Question 2: How did the accountant correctly arrive at ₹87 lakh as the recorded value of the new machine?

Question 3: Explain the advantages and one significant limitation of using historical cost for recording assets, with reference to the scenario above.

Passage

Question 1: Which accounting concept was violated when the entire cost of the printing machine was charged as an expense in one year?

Question 2: Was the accountant correct in excluding the March 2023 salaries from 2022–23 accounts? Which concept governs this treatment?

Question 3: Critically evaluate all three accounting treatments in the passage using relevant accounting concepts, and state the correct treatment for each.

Passage

Question 1: Which accounting concept was violated by Deepak & Sons when they changed accounting methods without disclosure?

Question 2: Does the Consistency Concept mean that accounting methods can never be changed? Explain.

Question 3: Explain how the Consistency Concept aids both inter-period and inter-firm comparisons and why the analyst faced difficulty in both types of comparison in this case.

Passage

Question 1: Which accounting concept explains why closing stock is valued at ₹8 lakh (cost) and not ₹11 lakh (market value)?

Question 2: Why was the sales order of ₹15 lakh not recorded as revenue? Which concept applies?

Question 3: Explain the logic behind recording a provision for the court liability but not the gain from rising stock prices, in the context of Conservatism Concept. What is the risk of excessive conservatism?

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