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

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

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Easy

Question 1

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What is meant by the Business Entity Concept in accounting?

The Business Entity Concept assumes that the business has a distinct and separate identity from its owner for accounting purposes.
Personal assets, liabilities, and transactions of the owner are not recorded in the business books unless they involve inflow or outflow of business funds.
Capital introduced by the owner is treated as a liability of the business to the owner, and drawings are treated as a reduction in the owner's capital.

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Short Answer

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Medium

Question 2

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State the Money Measurement Concept and one of its limitations.

The Money Measurement Concept states that only transactions expressible in monetary terms are recorded in the books of accounts.
Records are maintained in monetary units rather than physical units, enabling heterogeneous assets to be aggregated meaningfully.
A key limitation is that changes in the purchasing power of money over time are not reflected, making comparisons of values across different years unreliable.

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Question 3

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Explain the Going Concern Concept and its significance for asset valuation.

The Going Concern Concept assumes that a business will continue its operations indefinitely and will not be liquidated in the foreseeable future.
This concept provides the basis for valuing assets in the balance sheet by allowing only the consumed portion of an asset to be charged as expense in a period.
If this concept did not apply, the entire cost of an asset would have to be charged to revenue in the year of purchase, distorting profit figures.

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Question 4

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What is the Accounting Period Concept? Why are financial statements prepared periodically?

The Accounting Period Concept refers to the regular time span—normally one year—at the end of which financial statements are prepared.
Financial statements are prepared periodically because various users need timely information at regular intervals to make informed decisions.
Listed companies are also required to publish quarterly results to ascertain profitability and financial position every three months.

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Question 5

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Explain the Cost Concept and why historical cost is preferred over market value.

The Cost Concept requires that all assets be recorded at their purchase price, including acquisition cost, transportation, installation, and readying expenses.
Historical cost is preferred because it is objective and verifiable from purchase documents, unlike market value which may fluctuate and vary from person to person.
A limitation of this concept is that it may not reflect the true worth of the business during periods of rising prices, leading to hidden profits.

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Question 6

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State the Dual Aspect Concept and express it as an accounting equation.

The Dual Aspect Concept states that every business transaction has a two-fold effect and must therefore be recorded at two places in the books of accounts.
The duality principle is expressed as the fundamental accounting equation: Assets = Liabilities + Capital.
This concept forms the core of the Double Entry System of accounting, ensuring that the accounting equation always remains balanced.

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Question 7

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When is revenue considered to be realised under the Revenue Recognition Concept?

Revenue is considered realised when a legal right to receive it arises, i.e., when goods have been sold or a service has been rendered, not when cash is received.
Credit sales are treated as revenue on the date of sale; income such as rent and interest is recognised on a time basis regardless of when cash is received.
Exceptions include long-term construction contracts where proportionate revenue based on work completed is recognised, and hire purchase sales where instalments collected are treated as realised.

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Question 8

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What does the Matching Concept require? Give one example.

The Matching Concept requires that expenses incurred in an accounting period be matched with the revenues earned during that same period.
Revenue and expenses must belong to the same accounting period regardless of when cash is actually received or paid.
For example, only the cost of goods actually sold is matched against sales revenue, not the cost of all goods produced or purchased during the period.

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Question 9

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What is the Full Disclosure Concept? Why is it especially important in corporate organisations?

The Full Disclosure Concept requires that all material and relevant facts concerning the financial performance of an enterprise be fully disclosed in financial statements and footnotes.
In corporate organisations, ownership and management are separate, so financial statements are the primary—and often only—means of communicating financial information to owners.
Bodies like SEBI and the Companies Act mandate complete disclosures to give a true and fair view of profitability and the state of affairs.

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Question 10

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Explain the Consistency Concept. Does it prohibit changes in accounting policies?

The Consistency Concept requires that the same accounting policies and methods be followed uniformly from one accounting period to the next to enable meaningful comparisons.
It eliminates personal bias and ensures that profit figures across periods are comparable, facilitating informed decision-making by users.
Consistency does not prohibit necessary changes in accounting policies; however, such changes must be fully disclosed in the financial statements along with their probable effects on financial results.

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Question 11

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What is the Conservatism Concept? Give two practical examples of its application.

The Conservatism Concept states that anticipated losses must be provided for immediately, but unrealised gains should not be recorded until actually realised.
One example is valuing closing stock at cost or market value, whichever is lower.
Another example is creating a provision for doubtful debts when some debtors are unlikely to pay.

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Question 12

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What does the Materiality Concept state? Give an example where strict accounting principles are not required.

The Materiality Concept requires that accounting focus on material facts—those that would reasonably influence the decision of an informed user of financial statements.
Items that are not material in nature or amount need not be strictly capitalised or disclosed, as recording them would waste effort without benefiting users.
For example, stationery items like pencils, erasers, and scales are not shown as assets; their total cost is treated as revenue expenditure in the year of purchase.

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Question 13

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Explain the Objectivity Concept. How does historical cost support this concept?

The Objectivity Concept requires that accounting transactions be recorded in a bias-free manner, supported by verifiable documents or vouchers.
Historical cost supports objectivity because the actual cost paid for an asset can be verified from purchase documents such as cash receipts, invoices, or delivery challans.
Market value, by contrast, cannot be verified objectively as it may vary from person to person and from place to place.

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

What is meant by the Business Entity Concept in accounting?

State the Money Measurement Concept and one of its limitations.

Explain the Going Concern Concept and its significance for asset valuation.

What is the Accounting Period Concept? Why are financial statements prepared periodically?

Explain the Cost Concept and why historical cost is preferred over market value.

State the Dual Aspect Concept and express it as an accounting equation.

When is revenue considered to be realised under the Revenue Recognition Concept?

What does the Matching Concept require? Give one example.

What is the Full Disclosure Concept? Why is it especially important in corporate organisations?

Explain the Consistency Concept. Does it prohibit changes in accounting policies?

What is the Conservatism Concept? Give two practical examples of its application.

What does the Materiality Concept state? Give an example where strict accounting principles are not required.

Explain the Objectivity Concept. How does historical cost support this concept?

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