Class-9 : Book Keeping & Accountancy - Unit-II : Basic Accounting Concepts
UNIT II
Basic Accounting Concepts
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VERY SHORT ANSWER TYPE QUESTIONS
1. What do you mean by basic accounting concepts ?
Ans : Basic accounting concepts are the basic assumptions or fundamental
propositions within which accounting operates. These concepts guide how
transactions should be recorded & reported.
2. What is the Business Entity Concept ?
Ans : According to this concept, business is treated as a unit separate and
distinct from its owners. Business transactions, therefore, are recorded
from firm's point of view and not from the point of view of the
proprietor.
3. Write the meaning of Money Measurement Concept.
Ans : According to Money Measurement concept, only those transactions and
events are recorded in accounting which are capable of being expressed in
terms of money.
4. Explain in brief Going Concern Concept.
Ans : As per this concept, it is assumed that the business will continue to
exist for a long period in the future. The transactions are recorded in the
books of the business on the assumption that it is a continuing
enterprise.
5. What do you mean by Accounting Period Concept.
And : As per this concept, entire life of an enterprise is divided into
time intervals which are known as accounting periods at the end of which a
profit and loss account is prepared to ascertain the profit and a balance
sheet is prepared to ascertain the financial position. This concept is also
known as periodicity concept.
6. What do you understand by Dual Aspect Concept ?
Ans : According to this concept, every business transaction is recorded as
having a dual aspect. In other words, every transaction affects at least two
accounts simultaneously. If one account is debited, any other account must
be credited. This concept is the basis for double entry accounting.
7. Write features of Double Entry System.
Ans : Following are the features of Double Entry System.
I. It recognises two fold aspect of every transaction, i,e. the aspect of
receiving & the aspect of giving.
II. It maintains a complete record of each & every
transaction.
III. There are certain rules and regulations for recording the
transactions. On the basis of these rules and regulations, the respective
accounts are debited & credited.
IV. For every debit entry, there is an equal and opposite credit
entry.
V. When transactions are recorded in journal and ledger according to the
double entry system then it will help in preparing the trial balance
also.
8. Who introduced the concept of Double Entry System ?
Ans : The Double Entry System was introduced by "Luca Pacioli" in 1494 in
Venice.
9. Write advantages of Double Entry System.
Ans : Following are the advantages of Double Entry System.
I. It helps to record a financial transaction in a systematic and
scientific manner.
II. It helps to prepare trial balance to check arithmetical of books of
accounts.
III. It helps to determine net profit or net loss of the business at the
end of a financial year.
IV. It helps to ascertain the true financial position of the business at a
particular point of time.
10. What is Cash Basis of Accounting ?
Ans : Cash Basis of accounting is a system in which incomes are not
recorded unless they are received in cash. Similarly, expenses are recorded
only when they are paid in cash. In other words, credit transactions are not
recorded at all & are ignored till cash is actually received or paid for
them. This basis is useful for professional people like lawyers, doctors,
chartered accountants etc.
SHORT ANSWER TYPE QUESTIONS
1. What are basic accounting concepts? Explain any two concepts.
Ans : Basic accounting concepts are the basic assumptions or fundamental
propositions within which accounting operates. These concepts guide how
transactions should be recorded & reported. It is important to follow
the accounting concepts in order to make the accounting information
meaningful to its users.
Accounting concepts can be classified as below :
I. Business Entity Concept.
II. Money Measurement Concept.
III. Going Concern Concept.
IV. Accounting Period Concept.
V. Dual Aspect Concept.
The above concepts can be explained as -
I. Business Entity Concept - According to this concept, business is
treated as a unit separate and distinct from its owners. Business
transactions, therefore, are recorded from firm's point of view and not from
the point of view of the proprietor. The owner/proprietor is treated as a
creditor (Internal liability) for his investment in the business, as if the
firm has borrowed from its owner instead of the outside parties. Similarly,
the amount withdrawn by the proprietor from the business for his personal
use is treated as drawings.
II. Money Measurement Concept - According to this concept, only those
transactions and events are recorded in accounting which are capable of
being expressed in terms of money. Non- monetary events like death of any
employee/Manager, strikes, disputes etc., are not recorded at all, even
though these also affect the business operations significantly. Also, the
records of the transactions are to be kept not in the physical units but in
the monetary units.
2. Explain Business Entity Concept with example.
Ans : According to this concept, business is treated as a unit separate and
distinct from its owners. Business transactions, therefore, are recorded
from firm's point of view and not from the point of view of the proprietor.
The owner/proprietor is treated as a creditor (Internal liability) for his
investment in the business, as if the firm has borrowed from its owner
instead of the outside parties. Similarly, the amount withdrawn by the
proprietor from the business for his personal use is treated as drawings.
This principle of separate entity is applicable to all forms of business
organization, i.e, sole proprietorship, partnership or a company.
Example - If the owner of a business concern has spent ₹3,000 on
paying rent of business shop and he has also spent ₹5,000 on education of
his child, accountant will only record the rent paid by the owner as it is
related with business and the later expenses will not be recorded as it
comes in the personal matters of owner.
3. What is Accounting Period Concept ?
Ans : As per this concept, entire life of an enterprise is divided
into time intervals which are known as accounting periods at the end of
which a profit and loss account is prepared to ascertain the profit and a
balance sheet is prepared to ascertain the financial position. This is
required so that the performance is measured at regular intervals and
decisions can be taken at the appropriate time. Accounting period is usually
a period of one year, which may be a financial year or a calendar year. This
concept is also known as periodicity concept.
4. Write a short notes on :
I. Accounting Period Concept : Same as (S.A - Q.No. 3)
II. Dual Aspect Concept : According to this concept, every business
transaction is recorded as having a dual aspect. In other words, every
transaction affects at least two accounts simultaneously. If one account is
debited, any other account must be credited. This concept is the basis for
double entry accounting. Due to this principle, the two sides of the Balance
Sheet are always equal and the following accounting equation will always
hold good at any point of time.
Assets = Liabilities + Capital
Example: Ram started business with cash ₹1,00,000 & takes a loan of
₹25,000 from the bank & these ₹1,25,000 are used in buying a factory,
the equation in this case will be follows :
Assets = Liabilities + Capital
₹1,25,000 = ₹25,000 +₹1,00,000
III. Going Concern Concept : As per this concept, it is assumed that
the business will continue to exist for a long period in the future. It
implies that the business does not have an intention to liquidate or to
scale down its operations significantly. Thus, the transactions are recorded
in the books of the business on the assumption that it is a continuing
enterprise. It is on this concept that fixed assets are recorded at their
original cost not at market price and depreciation is charged in a
systematic manner. It is also because of this concept, distinction between
capital expenditure and revenue expenditure are made. Also without this
concept, the classification of current & fixed assets and short &
long term liabilities cannot be made.
IV. Money Measurement Concept : According to this concept, only
those transactions and events are recorded in accounting which are capable
of being expressed in terms of money. Non- monetary events like death of any
employee/Manager, strikes, disputes etc., are not recorded at all, even
though these also affect the business operations significantly. Also, the
records of the transactions are to be kept not in the physical units but in
the monetary units.
Example : The CEO of Tata Motors delivers a lecture to the employees
in a special meeting that can be helpful in raising the employees’ morale
and completing the current projects on time. As the value of the lecture
cannot be measured in terms of money, it cannot be recorded in the books of
accounts of Tata Motors.
5. What is Double Entry System of accounting ? Explain two advantages and
disadvantages.
Ans : Double Entry System is a system of accounting under which every
business transaction has two aspects - a debit and a credit aspect. Every
debit has a corresponding credit and the total of all debits equals the
total of all credits.
Example - Received ₹5000 from Saurav. This transaction affects two
accounts - Cash A/c and Saurav's A/c. Cash A/c is receiving a benefit (as
cash is coming in) and hence Cash A/c will be debited, whereas Saurav is
yielding a benefit and hence his account will be credited.
Following are the advantages (any two) of Double Entry System :
I. Scientific System : It is a scientific system of recording
business transactions as compared to other system of book keeping because
transactions are recorded in this system according to certain specified
rules.
II. Complete record of transactions : Under this system, both sides
of a transaction are recorded. It is a complete record as it results in
showing correct income or loss, assets and liabilities.
III. Check on the accuracy of accounts : By the use of this system,
arithmetical accuracy of the accounting record can be established through
the trial balance.
IV. Determining Profit or Loss : It helps to determine net profit or
net loss of the business by preparing Profit & Loss A/c at the end of a
financial year by preparing Profit & Loss A/c.
V. Knowledge of Financial Position : It helps to ascertain the true
financial position of the business by preparing balance sheet at a
particular point.
Following are the disadvantages (any two) of Double Entry System :
I. Requirement of expert knowledge : Now a days, accounting is a
profession & is practised by qualified Chartered Accountants.
II. Lengthy process : The process of recording, classifying,
analysing and interpreting is lengthy & time consuming.
III. Expensive : Accounting department requires qualified &
trained personnel for recording and maintaining the books of accounts. So,
it is expensive to give high salaries to trained staff.
6. Explain Accrual basis of accounting with advantages.
Ans : Under Accrual basis of accounting, incomes are credited to the period
in which they are earned, irrespective of the fact whether cash is received
or not. Similarly, expenses are recorded when they are incurred or become
due and not when the cash is paid for them. This basis is also known as
Mercantile basis of accounting. Under this system, expenses such as outstanding expenses, prepaid expenses,
accrued income and received in advance are identified and taken into
account.
Under the companies’ amendments Act 2013, all companies are required to
maintain their accounts according to accrual basis of accounting.
Following are the advantages of accrual basis of accounting :
I. It is more scientific as compared to cash basis of accounting and hence
is preferred by accountants.
II. It follows the matching principle of accounting.
III. This basis discloses true profit or loss for a particular period and
also depict true financial position of the business at the end of a
particular period.
IV. It is helpful in presenting the true financial position of business and,
therefore, has wide acceptability.
V. The Companies Act, 2013 recognise accrual basis of accounting.
LONG TYPE QUESTIONS
1. Explain basic accounting concepts.
Ans : Same as (S.A - Q.No. 1 & Q. No. 4)
2. Explain Going Conecern Concept & Dual Aspect Concept.
Ans : Same as [S.A - Q.No. 4 (III) , (II)]
3. What is Double Entry system ? Explain its disadvantages.
Ans : Same as (S.A - Q.No. 5)
4. Explain Cash Basis & Accrual Basis of Accounting.
Ans : Same as (V.S.A - Q.No. 10) & [S.A - Q.No. 6 (first part)]
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