GSEB Solutions Class 11 Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting

   

Gujarat Board GSEB Textbook Solutions Class 11 Commerce Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting Textbook Exercise Questions and Answers.

Gujarat Board Textbook Solutions Class 11 Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting

GSEB Class 11 Accounts Conventions, Assumption, Concepts and Principles of Accounting Text Book Questions and Answers

Question 1.
Explain the need for accounting principles or concepts or conventions or postulates or assumptions that are used while writing accounts and in preparing financial statements.
Answer:
We know very well, accounts is a useful device (tool) for the information related to the business. Accounts is useful in different ways, for different concerned parties. Various accounting principles, concepts, conventions, postulates and assumptions are used while writing books of accounts and preparing financial statements. Accounts also provides theoretical and logical base to accounting.

If these principles, concepts and assumptions are not used properly in practice, it may provide wrong accounting information to the user of information and after all it affects on the future decisions or policies. Therefore, it is absolutely necessary that accounting principles, concepts, conventions, postulates and assumptions are to be used to maintain the uniformity between the writer of the books of accounts and user of information for the financial transaction of business.

Following are the needs for accounting principles, concepts, conventions, postulates and assumptions :

  • Because of this, the uniformity between the writer of books of accounts and the user of information can be maintained and developed.
  • Due to this, comparison of accounts of the years is possible.
  • It gives theoretical as well as logical base’ to accounting.
  • Due to these all, accounts become a science or disclaim. And it is used as the language of business.
  • It creates ideological structure of accounts.
  • Accounts becomes free from personal bias and whims.
  • Principles of accounting are the general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice.
  • Accounting system is based on some concepts and principles, that is why, they are important.

Question 2.
Write a short note on:
1. Going concern concept
Answer:
Generally, the accounts of the business are prepared with the assumption that the business is going to be continued and is not to be closed in near future. This concept is known as Going concern concept. The creditors supply goods and services with the expectation that the business is to go on for a long period of time. The money lenders or financial institutions offer investments based on this principle.

When depreciation is calculated on fixed assets, it is presumed that the assets will be used in the business for a long time. At the end of the accounting year, the provision for bad debts and discount reserve are also made based on this assumption. A provision is made for future contingent liability based on the presumption. Based on the concept that the business is going to continue for a long period of time, the transactions are recorded in the books of accounts.

This concept is important in the following cases:
(1) When the benefit from a certain expense is to be received not only during that year but for a long period of time, then such expense is written off or distributed in the future years. The expense of that year is recorded in the Profit and Loss Account and the balance is shown on the Assets side of the Balance Sheet.

(2) Depreciation on the assets is written off or apportioned over the useful life of the asset. Thus according to this concept, the asset is not recorded in the books at the market price, but is recorded in the books at original cost price.

(3) If the business is to run for a specific period of time, then the total cost of the asset is treated as expense of that period and is matched against the revenue of that period, e.g., joint venture for construction of bridge or construction of dam.

(4) According to this principle, fixed assets are shown at cost less depreciation and the current assets are shown at their realisable value in the Balance Sheet.

(5) Distinction is made between ‘Capital expenditure’ and ‘Revenue expenditure’ because of going concern assumption.

In the following circumstances, this concept should not be followed :

  • When the object for which a business was established is achieved or is likely to be accomplished in very short period;
  • When an industrial unit is declared sick;
  • When a liquidator is appointed for liquidation of a company;
  • When a business is likely to be liquidated very shortly.

2. Consistency concept
Answer:

  • The consistency concept suggests that while writing accounts or preparing financial statements, the same policies, procedures and methods should be followed every year.
  • Accounts remain comparable only if consistency is maintained. If consistency is not maintained in accounting, the accounts may not remain comparable and can also mislead at times.
  • In the consistency principle, personal bias can be avoided, the accountant has to follow consistently the same set of principles, practices, procedures or methods every year.
  • For example, if stock is valued by FIFO method, the entity should follow the same method year after year as far as possible.
  • In this way, if depreciation is provided by straight-line method in a year, the same method should be followed consistently every year.
  • If the method of stock valuation or method of depreciation is changed every year, the accounts do not remain comparable and the profit or- loss position of different years may also indicate different.
  • However, valuation of stock at cost or market price, whichever is less every year does not violate the principle of consistency.
  • The logic behind the principle of consistency is that the users of financial statements lose confidence in the accounts if frequent changes are made in the policies or practices based on personal whims and fancy of those preparing the same.
  • Consistency does not mean that the accounting policy or procedure can never be changed. When circumstances change or change in policy or procedure or method can present a better view of accounting information, the change can be made with appropriate reasoning. However, such changes should not be made frequently.

GSEB Solutions Class 11 Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting

3. Accrual concept
Answer:
Acctual concept implies that the revenue should be recognised and recorded in accounting as and when it is earned or it accrues irrespective of the time or period of receipt. Similarly, expenses should be recognised and recorded in accounting as and when it is incurred irrespective of the period of payment thereof. In short, this concept is relevant in the area of revenue and costs.

Revenue or costs are accrued, i.e., recognised, as they are earned or incurred and not only when cash is received or paid. Also, the revenue and costs will be recorded in the period to which they relate, e.g., When goods are sold on credit to a customer, the revenue should be recognised in accounting when such goods are sold even though cash is not yet received for such sale.

Salary payable for March 2018 will be treated as expense for the month of March 2018 even if it is paid in April 2018. This concept have some limitations. In case of gold mine, as soon as the production of the gold is obtained it is recorded in the books at selling price. In construction of bridge, road or building, profit is calculated even though the construction is incomplete. Professionals like advocates, doctors, chartered accountants, etc. record their fees as revenue at the time of its actual receipt.

The concept of accrual of revenue is similar to concept of realisation of revenue. It guides about the point in time when revenue should be recognised or when revenue should be treated as realised. However, accrual concept deals with accrual of not only revenue but also that of costs.

4. Accounting entity concept or Business entity concept or Entity concept or Separate entity concept
Answer:
For the purpose of accounting, the business will be treated quite separately from the owner of the business. The business is a different person and the owner is also a different person. Business transactions are recorded in the books of business, while personal transactions of the owner are not recorded in the books of business.

From business point of view, the owner’s amount is payable to him due to which there is no difference between a creditor and the owner. The owner makes investments in the business which means that the owner has given the amount to the business and the business has received the amount from the owner of the business. The personal assets of the owner are not included in the assets of the business. The capital invested by the owner in the business is a type of liability of the business.

The concept of business entity is applicable to all forms of business organisations. This concept is clearly observed in limited company as a limited company obtains separate individual personality by law.

Because of the concept of business entity, the transactions between the business unit and the owner are recorded in the following manner in the books of accounts:

  • The amount invested by the owner in the business is credited in the capital account which is liability of the business.
  • When the owner withdraws money for personal use or when any personal expenses is paid from the business or assets are withdrawn by the owner from the business, all these are debited to drawings account.

According to accounting entity, It is assumed that business has the separate existence and its entity is different from that of its owner(s). Each business is considered as a separate entity in spite of common owner thereof.
Accounting entity comprises of proprietorship, partnership firm, corporation, limited company, co-operative society and non-trading concerns as well.

5. Money measurement concept
Answer:
According to Money measurement concept, only those events or transactions, which can be measured in terms of money, are recorded in the books of accounts. For accounting, money is accepted as common measurement unit. Economic worth of assets and liabilities are stated in monetary terms instead of their physical quantity. Therefore, according to this concept, the transactions which cannot be measured in terms of money are not recorded in accounts.

For example, the amount brought by the owner as capital is recorded in terms of money. If we record the quantity of goods or assets, how to present the same becomes an issue. Similarly, for payment of any expenses, money is the only measurement unit. Therefore, for accounting, money measurement is an accepted accounting concept.

This concept has two important limitations :

  1. According to this concept, value of money remains stable every year or the changes in the value of money is immaterial and hence of no significance, e.g., A motorcar purchased in 2014 for say ₹ 8,00,000 is shown in account of 2018 at the same value less depreciation, though its present value may be different in 2018.
  2. The transactions and events affecting business, though important, are not recorded in the books of accounts of business if they cannot be measured in terms of money. For example, factory workers going on strike, disputes between Production Manager and Sales Manager, Changes in the sales policy, etc. have a material impact on business operations.

6. Periodicity or Accounting period concept
Answer:
At the time of preparing accounting books, one assumption is made that the business will be continued for unlimited time period and it will not be closed in the near future. Because of this reason, the owner of the business cannot maintain the accounts of the business for an unlimited time period. Even if the business is to continue for a long period, it is necessary to know the results of the business at the end of a specific time period. Thus, the whole life of the business is divided into specific time intervals.

Generally, such accounting period is kept for one year. The reason for taking the accounting period as one year is that all types of transactions of the business are covered in this period. A period of one year comprises all seasons and therefore all types of seasonal transactions are covered. Accounting year may be the calendar year, or from 1st April to 31st March or Kartak Sud 1 to Aso Vad, but for income tax purposes the accounting year is kept from 1st April to 31st March.

At the end of every accounting year, a Profit and Loss Account and a Balance Sheet has to be prepared. The Profit and Loss Account shows the annual results and a Balance Sheet shows the financial position of the business. Many times the accounts are also prepared monthly, quarterly or half-yearly. The accounting records are useful to the owner of the business, creditors of the business, lending institutions, banks, government offices, etc.

Periodicity concept is related to going concern concept. For internal users of financial statements, this accounting period could be of a month or a quarter also.

GSEB Solutions Class 11 Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting

7. Full disclosure or Disclosure concept
Answer:
All types of accounting records or information are useful to the owner of the business, creditors, banks, investors, lending institutions, government, employees, etc. According to this concept, all material information should be disclosed in the financial statements. To enable the users of the financial statements to take correct economic decisions, it is necessary to disclose all the relevant information in the financial statements. Financial statements should be prepared honestly. According to Section 129 (1) of the Companies Act, 2013, the financial statements shall give a true and fair view of the state of affairs of the company.

All material information should be disclosed in the financial statements. No material information affecting the interest of general investors should remain undisclosed or concealed. Good accounting practice demands that all significant information should be disclosed irrespective of legal requirements to do so. Even when there is no legal requirement to disclose particular information, material or significant information is to be disclosed.

The practice of appending notes or schedules to the financial statements has developed as a result of the principle of full disclosure, e.g., information about contingent liabilities, market value of investments, method of valuation of stock, company policies, future plans, etc.

8. Materiality concept
Answer:
Materiality means ‘relative importance’. Materiality refers to what is significant and what is insignificant. According to this concept, any information would be shown in detail in financial statements only when the same is useful to the users of such information. Thus, accountant is not required to disclose in account or in financial statements any immaterial transactions. Materiality of an item depends upon the amount and the nature of that item.

When small tools like small hammers, nails, screws, screwdrivers, etc. are used, there is no need to maintain separate accounts for each of these items. Only one account of Loose Tools Account would serve the purpose.
Similarly, instead of keeping separate accounts for pencil, erasers, pen, etc., only one account styled as ‘Stationery Expense Account’ shall be maintained because it is not necessary to maintain separate accounts for small and immaterial items.

Purchase of dustbin for ₹ 15 should be considered as a revenue expense instead of considering the same to be a fixed asset. Where any expense exce’eds 1 % of sales amount, it may be necessary to maintain separate account thereof.

It is not possible to give a definite rule for determining the materiality in each case. It depends upon the quantum of amount, relevance and importance of such an item or a transaction in the business.
Commission paid to sole selling agent is a material item and hence the same should be disclosed separately in the Profit and Loss Account.

Change in the method of depreciation is also material information as it effects the profit or loss of the enterprise and also affects book value of fixed assets. Therefore, this should be disclosed in financial statements.

9. Prudence or Conservation concept
Answer:
A possibility of probable loss in future is to be considered for but a possibility of future profit of revenue is not to be considered. Such a concept is known as Prudence or Conservation concept. According to this concept of prudence, an accountant does not take into account anticipated gain or profit to be received in future but provides for all anticipated losses. For example, closing stock is valued at cost price or market price, whichever is less.

Similarly, in the accounts, provision for bad debts on debtors, discount reserve on debtors, provision for repairing reserve, taxation provision, investment fluctuation fund, etc. are made based on the principle of prudence only. In accounting for sale under “sale or return” basis also income is not recognized based on this principle only. The sale income is recognized only when confirmation is received from the buyer for having accepted the sales.

According to the concept, in case of accounts for long term contracts also when the work completed is very less, entire profit of that year is reserved by transfer to work in progress account. (It means the profit is not taken into account). However, if there is loss, the same shall be taken into account. According to this concept, all research and development expenses are debited to the Profit and Loss Account of the year in which they are incurred even if the benefit of such expenses is derived in future. In this way, utmost care is to be taken while preparing the books of accounts. Such a concept is called as Prudence concept or Conservations concept.

According to this principle, there may be any possibility that the net profit of the business might be lesser than the actual profit, due to which the goodwill of the unit is maintained, Because of this principle, in the form of company organisation, the possibility of unfairly excess distribution of dividend, decreases. This concept also violates the concept of full disclosure.
In the present age, the use of this concept is increasing day by day. For the Profit and Loss Account to show true profit or loss and the Balance Sheet to show a fair financial position of the business, it is required to use this concept. From the accounting point of view, it is not fair to conceal the true profit and financial position of the business by creating more than the required provisions.

GSEB Solutions Class 11 Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting

10. Cost concept
Answer:
Accounting cost concept states that all assets are recorded in the books of accounts at their monetary cost of acquisition and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc., are recorded in the books of accounts at a total price paid for them. For example, a machine purchased by XYZ Limited for ₹ 5,00,000, for manufacturing shoes. An amount of ₹ 10,000 were spent on transporting. In addition, ₹ 5,000 were spent on its installation.

The total amount at which the machine will be recorded in the books of accounts would be the sum of all these items, i.e., ₹ 5,15,000. This cost is also known as historical cost. Suppose the market price of the same now ? 9,00,000 it will not be shown at this value. The effect of cost concept is that if the business entity does not pay anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price.But no accounting entry is made for free samples received as there is no cost.

11. Dual Aspect or Duality concept
Answer:
In each accounting transaction, minimum two aspects or two accounting matters are concerned. The two aspects or effects are the debit effect and the credit effect. One effect is receiving of benefit which is debited and the other effect is giving of benefit which is credited. This way the total of the debit and credit balances is equal. In other words, each receiver is the giver and each giver is the receiver, e.g., Anish purchased goods worth ₹ 3,000 on cash from Raj Traders. In this transaction, Anish receives the goods and gives the money, whereas Raj Traders gives the goods and receives the money. This way there is a credit effect in one or more accounts, of equal amount having a debit effect in one or more accounts. As a result, the total of debit balances is equal to the total of credit balances.

On this basis, a simple equation is prepared which is C + L = A. If the funds invested by the owner in the business is known as ‘C’ (Capital), the amount invested by third parties in business is known as X (Liabilities) and Assets are known as A’, then the equation indicates that, on the assets of the business, there is a right of the owners and creditors (liabilities). The assets in the business will be equal to the funds invested in the business by the owner of the business and creditors.

Then the following equation is available :
C + L = A
Change on one side of this equation brings the same and the similar change on the other side of the equation. As per the dual aspect, if there is change in stock or assets due to an opposite effect in some other asset then there is no change in the total assets of the business. If any asset is purchased on credit, then there is an increase in the assets, and similarly, there is also an increase in the liabilities by the same amount. When capital is invested in the business, there is an increase in the assets as well as in the capital of the business.

Question 3.
Explain the concept of Going concern giving example.
Answer:
According to this concept, it is assumed that the business concern will continue for a long period and the same will not be closed or liquidated in the near future.
Examples :

  • Fixed assets of business are shown in Balance Sheet at their depreciated values and not at their market or realizable values, while current assets are shown at their realizable values in the Balance Sheet.
  • Prepaid revenue expenses are shown on the Assets side of Balance Sheet.
  • Deferred revenue expenses, which are not written off yet, are shown on the Asset side of Balance Sheet.
  • Financial Statements are prepared at the end of accounting period. When the life of business entity is of very long period, on the basis of assumption of going concern.
  • Semi-finished goods or work-in-progress is valued at cost incurred thereon and not at their realisable value.
  • Distinction is made between ‘Capital expenditure’ and ‘Revenue expenditure’ because of this concept.
  • If the business is to run for a specific period of time, then the total cost of the asset is treated as expense of that period and is matched against the revenue of that period, e.g., joint venture for construction of bridge or construction of dam.
  • In the Balance Sheet the receivable amount are shown at realisable value only.
  • When a business has to be closed for any reason, then it is appropriate to show assets at the market values.
  • Assets like goodwill, patents, trademark and copyright are not written off in one year.

GSEB Solutions Class 11 Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting

Question 4.
Explain the concept of consistency giving example.
Answer:
While writing accounts or preparing financial statements, the same policies, procedures and methods should be followed every year. In this way, uniformity is to be maintained in accounting entries, books and various statements.
Examples :

  • The method of stock valuation should be followed consistently and it should not be changed frequently, e.g., FIFO method, LIFO method, Weighted Average method.
  • However, valuation of stock at cost or market price whichever is less every year does not violate the principle of consistency.
  • The same method of depreciation and valuation for an asset should be followed consistently every year, e.g., Straight line method, Diminishing balance method, Depreciation fund method.
  • There is no violation of principle of consistency, if fixed assets are valued at cost price.
  • The change can be made in stock valuation method and depreciation method with appropriate reasoning. However, such changes should not be made frequently. Whenever change takes place, the same should be disclosed in the books of accounts.

Question 5.
Explain the concept of accrual with example.
Answer:
Accrual concept is relevant in the area of revenue and costs. Revenue or costs are recognised, as they are earned or incurred and not only when cash is received or paid. Also the revenue and costs will be recorded in the period to which they relate.
Examples :

  • When goods are sold on credit to a customer, to revenue should be recognised in accounting, even though cash is not yet received.
  • Based on accrual concept, unpaid expenses, prepaid expenses, revenue should be recognised in accounting, e.g., Salary payable for March 2018 will be treated as expense for the month of March 2018 even if it is paid in April 2018.
  • An advance received on the order of sales is not recorded in the books of accounts.
  • Commission, rent, interest, etc. incomes are recorded in the books of accounts.
  • Professionals like advocates, doctors, chartered accountants, etc. record their fees as revenue at the time of its actual receipt.
  • In construction of bridge, road or building, profit is calculated even though the construction is incomplete.
  • When purchase is made by instalment method, the amount is recorded as and when instalment is paid.
  • In case of gold mine, as soon as the production of the gold is obtained it is recorded in the books.

Question 6.
Explain the concept of accounting entity with example.
Answer:
For the purpose of accounting, the business will be treated quite separately from the owner of the business. The business is a different person and the owner is a different person. Business transactions are recorded in the books of business, while personal transactions of the owner are not recorded in the books of business.
Examples:

  • The amount invested by the owner in the business is credited in the capital account.
  • When the owner withdraws money, goods or assets for personal use or when any personal expenses is paid from the business, all these are debited to drawings account.
  • Firm gives interest on owner’s capital and charges interest on drawings.
  • The Independent branch prepares its own trial balance separately.
  • Profit is credited to the capital account.
  • The capital of the owner of the business is recorded as a liability in the Balance sheet.

Question 7.
Explain the concept of consistency with example.
Answer:
While writing accounts or preparing financial statements, the same policies, procedures and methods should be followed every year. In this way, uniformity is to be maintained in accounting entries, books and various statements.
Examples :

  • The method of stock valuation should be followed consistently and it should not be changed frequently, e.g., FIFO method, LIFO method, Weighted Average method.
  • However, valuation of stock at cost or market price whichever is less every year does not violate the principle of consistency.
  • The same method of depreciation and valuation for an asset should be followed consistently every year, e.g., Straight line method, Diminishing balance method, Depreciation fund method.
  • There is no violation of principle of consistency, if fixed assets are valued at cost price.
  • The change can be made in stock valuation method and depreciation method with appropriate reasoning. However, such changes should not be made frequently. Whenever change takes place, the same should be disclosed in the books of accounts.

Question 8.
Explain the concept of money measurement with example.
Answer:
In business, all transactions are represented in monetary unit. For accounting, money is accepted as common measurement unit.
According to this concept, only those events or transactions, which can be measured in terms of money, are recorded in the books of accounts. The transactions which cannot be measured in terms of money are not recorded in accounts.
Examples :

  • Instead of recording physical quantity of assets purchased, like chairs, tables, etc. the purchase will be recorded at monetary value of such assets.
  • Instead of recording physical quantity of goods sold, the sales will be recorded at monetary value of such goods.
  • When wages, salary, etc. are paid based on number of hours or days worked to different workers, the transaction will be recorded in books of accounts based on the monetary amount involved.
  • No accounting entry is recorded for strike by factory workers even if it is an important event affecting business.
  • No accounting entry is recorded in books of account for resignation of a competent and efficient production manager that may adversely affect the production.
  • No accounting entry is made in the books of accounts for advantage of having a team of sincere, honest, hard-working and efficient employees with the firm.
  • No accounting entry is recorded for death of a key employee of the firm even if it is an important event affecting business.
  • Balance Sheet is not a Valuation Statement.
  • Excellent quality of management is not directly shown in the Balance Sheet.

GSEB Solutions Class 11 Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting

Question 9.
Explain the concept of periodicity with example.
Answer:
The life of the business is divided into specific accounting periods. This is known as Accounting Period. At the end of each accounting period, financial statements are prepared. Usually, such accounting period is of 12 months, i.e., one year. A period of one year comprises of all seasons and therefore all types of seasonal transations are covered. Accounting year may be the calender year or financial year.
Examples:

  • Based on Periodicity concept, Profit and Loss Account and Balance Sheet are prepared at the end of every accounting period.
  • Since the life of the business is assumed to be indefinite or for a very long period, such life is divided into convenient accounting periods to ascertain performance and position of entity at the end of each such accounting period.
  • At the end of the year, the books of accounts are closed and new books are opened for the next year.
  • The entry of purchase of an asset is made in the books of accounts on the date when it is purchased.

Question 10.
Explain the concept of full disclosure with example.
Answer:
According to this concept, all material information should be disclosed in the financial statements. To enable the users of the financial statements to take informed economic decisions, it is necessary to disclose all the relevant information in the financial statements. No material information affecting the interest of general investors should remain undisclosed or concealed. Financial statements should be prepared honestly. According to section 129(1) of the Company Act, 2013, the financial statements shall give a true and fair view of the state of affairs of the company.
Examples :

  • Based on full disclosure concept, whenever there is change in method of providing depreciation, the impact of such change on the profit or loss and in the value of asset should be disclosed in financial statements.
  • Similarly, information about the change in method of stock or inventory valuation and its impact should be disclosed in financial statements.
  • In addition to book value of investment in listed shares, the market value thereof is also shown as additional information in financial statement.
  • The practice of appending notes or schedules to the financial statements has developed as a result of the principal of full disclosure, e.g., information about contingent liabilities, future plans, etc.

Question 11.
Explain the concept of materiality with example.
Answer:
Materiality concept is associated with the principle of full disclosure. According to full disclosure principle, all material information should be disclosed in the financial statements. Materiality depends on the relevance and reliability of information. Also Materiality refers to what is significant and what is insignificant.

According to this concept, any information would be shown in detail in financial statements only when the same is useful to the users of such information, while immaterial information may not be disclosed, e.g., Instead of preparing separate accounts for items like pen, erasers, rough writing pads, pencil, etc., only one account styled as ‘Stationery Expense Account’ shall be maintained.

Examples:

  • Instead of preparing separate accounts in factory for small tools like small hammers, nails, screws, screwdrivers, etc., only one account of ‘Loose Tools Account’ shall be maintained.
  • Purchase of dustbin for ₹ 45 should be considered as an expense instead of considering the same to be a fixed asset.
  • Instead of charging expenses of only partly used notebook (pad), full cost of notebook (notepad) is charged as expense to Profit and Loss Account even if the part thereof is still unused.
  • Any item of income or expenditure which does not exceed 1 % of the revenue from operations or ₹ 1,00,000, whichever is higher is not required to be separately shown in statement of Profit and Loss of a company unless specifically mandated otherwise.
  • If accounting year ends of 31st March, 2017 and a Electricity bill is received for the period of 3-3-’17 to 02-04-’17, entire value of this bill may be charged as expense to Profit and Loss Account for the period ended 31st March 2017 instead of charging expense for two day in the year 2017-18.

Question 12.
Explain the concept of prudence with example.
Answer:
A possibility of probable loss in future is to be considered for but a possibility of future profit of revenue is not to be considered. Such a concept is known as prudence concept or conservation concept. According to this concept, utmost care is to be taken while preparing the books of accounts.
Examples:

  • The closing stock is valued at cost price or market price, whichever is less.
  • Provision for doubtful debts on debtors is made in the accounts.
  • Provision for discount reserve on debtors is made in the accounts.
  • Provision for discount reserve on creditors is not made in the accounts.
  • Provision for reduction or erosion in value of investments is usually made in the books of accounts.
  • Contingent liabilities are shown in the Balance Sheet whereas contingent assets are not shown therein.
  • In case of long term contracts, when the work completed is very less or negligible, loss is to be considered, but profit is ignored.
  • All research and development expenses are usually debited to Profit and Loss Account of the year in which they are incurred.
  • Provision for loss of theft of uninsured stock will be made in the books of accounts soon.
  • When goods are supplied on ‘sale or return’ basis, the revenue is not recognised till the confirmation is received from the buyer for having agreed to purchase the same.
  • Bank credit interest on doubtful advances to Interest Suspense Account and not to Interest Account.
  • Assets like patents, goodwill, trademarks and copyrights are proportionately written off in the next coming years.
  • The amount payable to the employees as gratuity must be recorded in the company’s accounts.
  • Current assets like debtors are recorded in the books at the realisable value.

GSEB Solutions Class 11 Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting

Question 13.
Explain the concept of dual aspect with example.
Answer:
Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. According to this concept, every transaction has two-fold effect or has a dual impact on the accounting records.
(1) From the angle of benefit received and
(2) From the angle of benefit given. This concept is also called as duality concept. Duality principle is fundamental accounting convention and is the underlying basis for double entry book keeping system. The structure of accounting is based on this concept of duality. Accounting equation or Balance Sheet equation is also based on Dual aspect concept.

Examples:

  • If business acquires asset, so decrease in some other asset. For example, purchased Furniture of ₹ 5,000 for cash.
  • If business acquires asset, then increase in liability of business. For example, purchased furniture worth ₹ 5,000 from Radhe Furniture Mart.
  • If business acquires asset, therefore increase in capital of owner. For example, if owner has brought personal machine of ₹ 20,000 into business.
  • When goods costing ₹ 17,000 is sold for ₹ 20,000 for cash.
  • When goods costing ? 12,000 is purchased on credit.
  • When loan of ₹ 25,000 is received from Dena bank.
  • When salary of ₹ 10,000 is paid to clerk by cash.

Question 14.
Which three accounting principles or concepts or conventions are treated as fundamental accounting assumptions by ICAI?
Answer:
The International Accounting Standards Committee (IASC) and the Institute of Chartered Accountants of India (ICAI) treats following three concepts as the fundamental accounting assumptions :

  1. Going concern concept,
  2. Consistency concept and
  3. Accrual concept.

Question 15.
State the name of the accounting principle, concept or convention with which the following statements or situations are associated:
1. Revenue expenses paid in advance are shown on the asset side of Balance Sheet.
Answer:
According to Going concern concept, revenue expenses paid in advance are shown on the asset side of Balance Sheet.

2. Semi-finished goods or work-in-progress is valued at cost incurred thereon and not at their realisable value.
Answer:
According to Going concern concept, semi-finished goods or work-in-progress is valued at cost incurred thereon and not at their realisable value.

3. Financial statements are prepared at the end of accounting period.
Answer:
According to Going concent concept or Accounting period concept, financial statements are prepared at the end of accounting period.

4. If depreciation is provided by straight-line method in a year, the same method should be followed consistently every year.
Answer:
According to consistency concept, if depreciation is provided by straight-line method in a year, the same method should be followed consistently every year.

5. Frequent changes in the methods of depreciation or stock valuation should be avoided.
Answer:
According to Consistency concept, frequent changes in the method of depreciation or stock valuation should be avoided.

6. When goods are purchased, on credit from a supplier, the Purchase should be recorded in accounts immediately, even though cash is not yet paid for such purchase as the amount becomes payable once the goods are purchased.
Answer:
According to Accrual concept, when goods are purchased on credit from a supplier, the purchase should be recorded in accounts immediately, even though cash is not yet paid for such purchase as the amount becomes payable once the goods are purchased.

7. When partner of a partnership firm withdraws any amount from the firm, the partnership firm will debit this amount to partner’s drawings account.
Answer:
According to Accounting entity concept, when partner of a partnership firm withdraws any amount from the firm, the partnership firm will debit this amount to partner’s drawings account.

8. No accounting entry is recorded for death of a key employee of the firm even if it is an important event affecting business.
Answer:
According to Money measurement concept, no accounting entry is recorded for death of a key employee of the firm even if it is an important event affecting business.

9. In absence of any contrary information, life of the business is assumed to be indefinite or for a very long period and hence such life is divided into convenient accounting periods to ascertain performance and position of entity at the end of each such accounting period.
Answer:
According to Accounting period concept, in absence of any contrary information, life of the business is assumed to be indefinite or for a very long period and hence such life is divided into convenient accounting periods to ascertain performance and position of entity at the end of each such accounting period.

10. Any item of income or expenditure which does not exceed one per cent of the revenue from operations of ₹ 1,00,000 whichever is higher is not required to be shown separately in statement of profit and loss of a company, unless specifically required otherwise.
Answer:
According to Materiality concept, any item of income or expenditure which does not exceed 1 % of the revenue from operations or ₹ 1,00,000 whichever is higher is not required to be shown separately in statement of profit and loss of a company, unless specifically required otherwise.

11. Information about the change in method of stock of inventory valuation and its impact should be disclosed in financial statements.
Answer:
According to Full disclosure concept, information about the change in methods of stock or inventory valuation and its impact should be disclosed in financial statement.

12. Information about the change in method of providing depreciation and its impact should be disclosed in financial statements.
Answer:
According to Full disclosure concept, information about the change in method of providing depreciation and its impact should be disclosed in financial statements.

13. Provision for discount reserve on debtors is made in the accounts but provision for discount reserve on creditors is not usually made in the accounts.
Answer:
According to Prudence concept or Conservatism concept, provision for discount reserve on debtors is made in the accounts but provision for discount reserve on creditors is not usually made in the accounts.

14. Provision for loss of theft of uninsured machinery will be made in the books of accounts soon after the theft even it there is possibility of recovery of this machinery if police catches the thief.
Answer:
According to Prudence concept or Conservatism concept, provision for loss of theft of uninsured machinery will be made in the books of accounts soon after the theft even if there is possibility of recovery of this machinery if police catches the thief.

15. Anil purchased a shop from Bimal for 10 lakhs. Anil feels that he has got a very good bargain and he would have paid even ₹ 20 lakhs for this shop as he felt that this shop is at prime location. On the other hand, Bimal feels that this shop was very unlucky for him and he would have sold it even for ₹ 5 lakhs.

Because of these perceptions, though actual transaction has taken place at ₹ 10 lakhs, Anil wants to record this transaction in his books at ₹ 20 lakhs and Bimal wants to record this transaction in his books at ₹ 5 lakhs but their accountants have told them that the transaction should be recorded at ₹ 10 lakhs only based on some accounting principle, concept or convention which they do not remember.
Answer:
According to Cost concept, this transaction should be recorded at ₹ 10 lakhs only in the books of both parties.

16. It should be remembered that every transaction recorded in the accounts affects at least two items and accounting system is designed so as to record dual effects of a transaction. Hence, Accounting is called as ‘double-entry system’ or ‘double-entry bookkeeping system’.
Answer:
According to Dual aspect or Duality concept, every transaction recorded in the accounts affects at least two items and accounting system is designed so as to record dual effects of a transaction. Hence, Accounting is called as ‘Doubleentry system’ or ‘Double-entry bookkeeping system’.

17. Excellent quality management system of an entity is not reflected in its books of accounts even if such system enhances goodwill of the entity.
Answer:
According to Money measurement concept, excellent quality management system of an entity is not reflected in its books of accounts even if such system enhances goodwill of the entity.

18. Advance received from a customer cannot be credited to sales account.
Answer:
According to Accrual concept, advances received from a customer cannot be credited to sales account.

19. Capital is shown on the liability side of Balance Sheet of a business entity.
Answer:
According to Accounting entity concept, capital is shown on the liability side of Balance Sheet of a business entity.

20. Independent branch prepares its own trial balance separately.
Answer:
According to Business entity concept, independent branch prepares its own trial balance separately.

21. Trial Balance tallies if arithmetical accuracy is ensured.
Answer:
According to Dual aspect concept, trial balance tallies if arithmetical accuracy is ensured.

GSEB Solutions Class 11 Accounts Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting

Question 16.
Answer the following questions :
1. The owner of a business takes away goods of ₹ 3,000 from business for personal use. Where will you debit this? According to which Concept?
Answer:
When the owner of a business takes away goods of ₹ 3,000 from business for personal use, the Drawings account is debited with such amount. This statement is based on Accounting entity concept.

2. Fixed assets are shown in the balance sheet at their cost or market price whichever is less. Is this statement true or false? If the same is false, rewrite the correct statement and state the principle associated with it.
Answer:
This statement is false. According to Going concern concept, fixed assets of business are shown in Balance Sheet at their depreciated value and not at their realisable values.

3. According to which accounting principle or concept does Bank credit interest on doubtful advances to Interest Suspense Account?
Answer:
According to Prudence Concept or Conservatism concept, bank credits interest on doubtful advances to Interest Suspense Account.

4. A trader has taken a loan of ₹ 1,00,000 from a friend on 01-06-’16 at an interest rate of 12 % per annum and interest is payable annually on 1st June every year. The first interest on this loan will be payable by trader on 1st June 2017. The accounting year of this trader ends on 31st March every year. Will there be any accounting entry for interest in the books of this trader for the year ending on 31st March 2017? If yes, for which amount? According to which Concept?
Answer:
Yes, interest will be recorded in the books of accounts.
From Dt. 1-6-16 to Dt. 31-3-17
= Loan interest for 10 months.
Loan interest I = \(₹ 1,00,000 \times \frac{12}{100} \times \frac{10}{12}\)
= ₹ 10,000
There will be an entry for outstanding interest payable on loan ₹ 10,000 in the accounting year 2016 -T7 according to the Accrual concept.

5. An employee has filed a suit against a company claiming compensation of ₹ 1,00,000 for dismissing him from his job. According to the estimate of an advocate of the company, sum of ₹ 40,000 is likely to become payable. Will there be any entry in the books of the company for this event? If yes, for which amount? According to which principle? If the matter is pending in the court of law, is there any requirement to disclose the details of claim for compensation in financial statement? If yes, according to which concept?
Answer:
Yes, there will be an entry in the books for ₹ 40,000, according to the Prudence concept. According to this concept, recognise expenses or losses as soon as they are reasonably possible. In this case, if the matter is pending in the court of law, then according to Full disclosure concept, ₹ 1,00,000 should be disclosed in the financial statements as contingent liability.

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