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SEBA Class 9 An Introduction to Commerce Chapter 5 Accounting Principles and Concepts
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Accounting Principles and Concepts
Chapter – 5
| UNIT – II INTRODUCTION TO BOOK-KEEPING AND ACCOUNTANCY |
| Questions |
I. Short Questions:
(a) What do you understand by Accounting Concept?
Ans: Accounting concepts define the assumptions on the basis of which financial statements of a business entity are prepared. Certain concepts are perceived, assumed and accepted in accounting to provide a unifying structure and internal logic to accounting process. The word concept means idea or notion, which has universal application. Financial transactions are interpreted in the light of the concepts, which govern accounting methods. Concepts are those basic assumptions and conditions, which form the basis upon which the accountancy has been laid. Unlike physical science, accounting concepts lay the foundation on the basis of which the accounting principles are formulated.
(b) Write the names of different Accounting Concept.
Ans: The names of different Accounting Concept are mentioned below:
(i) Business Entity Concept:
(a) According to this concept, business and its owners are considered two separate entities distinct & different from each other. It means the business and its ownership are not the same.
(b) The owner is treated as an outsider and creditor of the company to the extent of capital contributed by him.
(c) In the books of accounts, those transactions are recorded which are related to the business only. The personal expenditure of the owner/owners is fully excluded from the books of account.
(d) All transactions of the business are recorded in the books of account from the business point of view, not from any individual point of view.
(ii) Going Concern Concept:
(a) According to this concept the business is considered as a running entity having indefinite period of life.
(b) It is assumed that the owner/ proprietor has no intention to close the business in near future and suppose to continue its operation in future course of time.
(c) Although, some business are closed down due to consecutive losses year after years, but no business is started in order to close down in future.
(d) This concept makes clear distinction between assets and expenditure of the business in such a way that –
1. Assets are valued at cost price and depreciated every year.
2. Expenses and income are classified into capital and revenue.
(c) What do you mean by Business Entity Concept?
Ans: (i) According to this concept, business and its owners are considered two separate entities distinct & different from each other. It means the business and its ownership are not same.
(ii) The owner is treated as an outsider and creditor of the company to the extent of capital contributed by him.
(iii) In the books of accounts, those transactions are recorded which are related to the business only. The personal expenditure of the owner/owners is fully excluded from the books of account.
(iv) All transactions of the business are recorded in the books of account from the business point of view, not from any individual point of view.
(d) What do you mean by Going Concern Concept?
Ans: (i) According to this concept the business is considered as a running entity having indefinite period of life.
(ii) It is assumed that the owner/proprietor has no intention to close the business in near future and suppose to continue its operation in future course of time.
(iii) Although, some business are closed down due to consecutive losses year after years, but no business is started in order to close down in future.
(iv) This concept makes clear distinction between assets and expenditure of the business in such a way that-
(a) Assets are valued at cost price and depreciated every year.
(b) Expenses and income are classified into capital and revenue.
(e) What do you mean by Money Measurement Concept?
Ans: (i) According to this concept, only those transactions are recorded in the books which carry a specific monetary value or can be expressed in terms of money.
(ii) Transactions and events which cannot be expressed in terms of money, they are not recorded in the books of account even if they have impact & influence over the business.
(iii) Generally, accounts are prepared by expressing the values in domestic currency and in case of international trade it is expressed in terms US Dollar.
(iv) All items in the books of accounts are expressed in terms of monetary value. So accounts are quantitative in nature, not qualitative in nature.
(f) What do you mean by Cost Concept of Accounting?
Ans: (i) According to this concept, any item or asset is recorded in the books at a price at which it is originally purchased. So, it is called that accounts are based on historical prices.
(ii) The books of accounts are not going to consider any changes in the market value of the asset after it is recorded in the books. It ignores the fluctuations in market prices.
(iii) This concept helps to keep the statements free from personal biases or judgments of any individual.
(iv) This concept is not beneficial for new investors as they are more interested in knowing the present value of the business rather than its historical cost.
(g) What do you mean by Dual Aspect Concept?
Ans: (i) According to this concept, every transaction has two aspects-Debit and Credit.
(ii) It states that the value of every transaction must be expressed in terms of debit and credit.
(iii) Due to these two aspects, the total amount on the debit side is always equal to the total amount on the credit side.
(iv) The concept of accounting equation is based on dual aspect concept. It states-
Asset = Capital + Liability
Assets: These are the resources owned by the business.
Liabilities: These are the claims against the assets.
Capital: Amount by which the business is started and considered as liability to owners.
(h) What do you mean by Realisation Concept?
Ans: (i) According to this concept, revenue is recognized only when sales are made, not when the cash is received. It means if the date of sale and amount received falls on two different dates, then the date of sale is considered as the date of earning income. Although, income is not received on that date.
(ii) This concept says that any change in the value of an asset is to be recorded only when business realizes it.
(iii) The profit cannot be recognized and recorded before sales. It means, profit is ‘post mortem’ in nature and it is recorded only after sales.
(iv) This concept prevents business firms from inflating their profits by showing expected incomes.
(i) What do you mean by Accrual Concept?
Ans: (i) According to this concept, a transaction should be recorded at the time when it takes place, not when the cash is realized.
(ii) It considers the income earned but not yet received (accrued income) and expenses incurred but not yet paid (outstanding expenses).
(iii) Every transaction and event affects one or more aspects of assets, liabilities and capital.
(iv) Profit and Loss Account and Balance Sheet is prepared by following this concept.
(j) What do you mean by Accounting Period Concept?
Ans: (i) The life span of an enterprise is divided into a smaller periods (usually one year) which is known as Accounting period.
(ii) Accounts are prepared at the end of the year and on an annual basis. It is also called ‘Financial Year’.
(iii) For companies, accounting period starts on 1st April of the current year and ends on 31st March of the next year. They do not follow calendar year as their accounting period. But, sole proprietorship business and small businesses may follow calendar year as their financial year.
(iv) It is also known as concept of periodicity which measures the financial performances of a business at a regular interval or annually.
(k) What do you mean by Matching Concept?
Ans: (i) According to this concept, expenses of a period should be matched with revenue of that period.
(ii) The expenses incurred during a period are recognized as expenses of that period.
(iii) It considers all incomes/revenues earned during a period whether received or not and all expenses incurred during a period whether paid or not, while preparing financial statements.
