CBSE Class 11 Accountancy: Theory Base of Accounting NCERT Solutions

Solution: The Going Concern Concept is a fundamental accounting assumption that presumes a business entity will continue its operations for an indefinite period into the future. This assumption is vital because it allows accountants to differentiate between revenue expenditures and capital expenditures. Revenue expenditures are costs incurred for the current period's operations, while capital expenditures are costs that provide benefits over multiple accounting periods. For instance, when a company purchases a piece of machinery costing Rs 1,00,000 with an expected useful life of 10 years, the Going Concern concept allows it to be treated as a capital expenditure. The benefit of this machinery will be spread over 10 years. Consequently, the annual depreciation charge of Rs 10,000 is treated as a revenue expenditure, reflecting the cost of using the asset in that specific year. Without the going concern assumption, assets might be valued at their liquidation value, and all expenditures might be treated as revenue, distorting the true financial performance and position of the business.

Solution: Revenue should generally be recognised when a sale takes place, whether for cash or on credit, or when the right to receive income from any source is legally established. This means that revenue is recognised at the point when the business has fulfilled its part of the transaction and has a claim to receive payment, not necessarily when the cash is actually received. For example, if Mr. A sells goods in January on credit and receives payment in February, the revenue is recognised in January because the sale (and thus the right to receive payment) occurred in January. Revenue is not recognised if payment is received in advance for goods not yet sold or services not yet rendered.

However, there are specific exceptions to this general rule:

1. Hire Purchase System: In a hire purchase arrangement, revenue is recognised as it is received in instalments over the period of the agreement, even though legal ownership might transfer later.
2. Long-term Construction Contracts: For projects like building dams or highways that span several years, revenue is recognised on a proportionate basis according to the work certified by the architect or engineer. This is often referred to as the percentage of completion method, rather than waiting for the entire project to be completed.

Solution: The basic accounting equation represents the fundamental relationship between a business's assets, liabilities, and owner's equity. It is stated as:

$$Assets\; =\; Liabilities\; +\; Capital$$

This equation signifies that all the resources (assets) owned by a business must be equal to the total claims against those resources. These claims come from two sources: creditors (liabilities) and owners (capital or owner's equity). In essence, it means that everything a firm owns must be owed to someone, either an outsider or the owner.

Solution: According to the realisation concept, revenue should be recognised when it is earned and realised, which means when the business has a legal right to receive the payment. In practice, for goods sold on credit, the transaction is typically included in the sales figure when the goods are b. invoiced.

Reason: Invoicing the goods signifies the transfer of ownership from the seller to the buyer. At the point of invoicing, the seller has fulfilled their obligation to provide the goods, and the buyer has incurred an obligation to pay. This establishes the legal right to receive the income, thus satisfying the conditions of the realisation concept. Dispatching goods does not necessarily mean ownership has transferred. Delivery might occur later, and payment is often received after invoicing. Therefore, invoicing is the most appropriate point to recognise sales revenue under the realisation concept.

Solution:

1. If a firm believes that some of its debtors may "default", it should act on this by making sure that all possible losses are recorded in the books. This is an example of the conservatism concept. (This concept requires anticipating potential losses but not potential gains.)
2. The fact that a business is separate and distinguishable from its owner is best exemplified by the business entity concept. (This concept treats the business as a distinct entity from its owners.)
3. Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the dual aspect concept. (This concept states that every transaction has two effects, leading to the accounting equation Assets = Liabilities + Capital.)
4. The consistency concept states that if straight line method of depreciation is used in one year, then it should also be used in the next year. (This ensures comparability of financial statements over time.)
5. A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be increased. Normal accounting procedure is to ignore this because of the conservatism (or prudence) concept. (This concept dictates that unrealised gains should not be anticipated.)
6. If a firm receives an order for goods, it would not be included in the sales figure owing to the revenue recognition concept. (Revenue is recognised when earned and realised, not merely when an order is received.)
7. The management of a firm is remarkably incompetent, but the firm's accountants cannot take this into account while preparing book of accounts because of the money measurement concept. (This concept states that only transactions that can be measured in terms of money are recorded in the books of accounts.)