Get summaries, questions, answers, solutions, notes, extras, PDF and guide of Chapter 2 Basic Accounting Concepts, NBSE Class 9 Environmental Education textbook, which is part of the syllabus of students studying under Nagaland Board. These solutions, however, should only be treated as references and can be modified/changed.
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Summary
Accounting is the language of business. It helps communicate financial information to people interested in the business. These people include owners, creditors, employees, investors, and the government. If every business used its own methods, it would cause confusion. So, GAAP provides common principles and concepts for maintaining accounts.
Accounting concepts are basic ideas that guide how transactions should be treated. These concepts make accounting information meaningful. One concept is the Business Entity Concept. This means a business is separate from its owners. Owners are seen as creditors to the business for the money they invest. Money taken out by owners for personal use is recorded as drawings. Goods used by owners personally are also recorded this way. This separation helps report profits fairly.
The Money Measurement Concept says only transactions expressed in money are recorded. For example, a firm with chairs, raw materials, and machines records them in monetary terms like ₹6,000 for chairs. Non-monetary things like manager skills or employee relationships are not recorded because they cannot be measured in money.
The Going Concern Concept assumes a business will keep running for the foreseeable future. It will not close down or sell everything soon. The Accounting Period Concept divides the life of a business into smaller periods. This helps measure performance regularly. Accounts are maintained assuming the business will continue.
The Dual Aspect Concept states every transaction has two sides. For every debit, there is a credit. This idea forms the basis of the Double Entry System. Luca Pacioli first introduced this system in 1494. Every transaction affects at least two accounts. This keeps the accounting equation balanced. Assets equal liabilities plus capital.
Double Entry System has advantages. It gives a complete record of transactions. It checks the accuracy of accounts through trial balance. It helps determine profit or loss and understand financial position. But it requires expert knowledge. It can be lengthy and expensive.
There are two ways to calculate profit or loss. The Cash Basis records transactions when cash is received or paid. Outstanding expenses and incomes are ignored. This method is simple but does not show a true picture. The Accrual Basis records income when earned and expenses when incurred, regardless of cash flow. It adjusts outstanding and prepaid items. This method is more scientific but complex. Companies Act, 2013 asks companies to follow this method.
These concepts help businesses maintain clear and consistent records. They ensure everyone understands the financial health of the business. This clarity helps stakeholders make informed decisions.
Textbook solutions
Multiple Choice Questions (MCQs)
1. As per Dual Aspect concept:
(a) Assets Liabilities- Capital
(b) Assets= Capital – Liabilities
(c) Assets Liabilities+ Capital
(d) Capital= Assets+ Liabilities
Answer : (c) Assets Liabilities+ Capital
2. As per Income Tax Act, accounting period is:
(a) From 1st January to 31st December
(b) From 1st April to 31st March
(c) From 1st July to 30th June
(d) From Diwali to Diwali
Answer : (b) From 1st April to 31st March
3. A business is considered to be having an indefinite life according to:
(a) Accounting Period Concept
(c) Going Concern Concept
(b) Dual Aspect Concept
(d) Business Entity Concept
Answer : (c) Going Concern Concept
4. Due to which principle qualitative transactions are not recorded in the books:
(a) Business Entity Concept
(c) Historical Cost Concept
(b) Money Measurement Concept
(d) Dual Aspect Concept
Answer : (b) Money Measurement Concept
5. During the life-time of an entity, accounting produces financial statements in accordance with which accounting concept?
(a) Dual Aspect Concept
(c) Business Entity Concept
(b) Accounting Period Concept
(d) Matching Concept
Answer : (b) Accounting Period Concept
True/False
1. Accounting is the language of business.
Answer: True
2. Accounting is a profession and is being practised by qualified chartered Accountants.
Answer: True
3. Cash Basis considers the revenue as realized when the goods are produced.
Answer: False
4. The enterprise is normally viewed as a going concern that is as continuing in operation for the Indefinite period.
Answer: True
Assertion Reason Based Questions
Choose the correct option :
A. Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of the Assertion (A).
B. Both Assertion (A) and Reason (R) are correct but Reason (R) is not the correct explanation of Assertion (A).
C. Only Assertion (A) is correct.
D. Only Reason (R) is correct.
1. Assertion: Only those facts and events are recorded which are expressed in terms of money.
Reason: As per money measurement concept only those transactions are recorded which are expressed in terms of money.
Answer: (A)
2. Assertion: Rules of debit and credit are same for liabilities and capital.
Reason: According to business entity concept capital is also treated as liability of the business.
Answer: (A)
Statement Based Questions
Choose the correct option from the options given below :
A. Statement I is true and II is false.
B. Statement II is true and I is false.
C. Both the statements are false.
D. Both the statements are true.
1. Statement I: As per Dual concept for every debit, there is always credit.
Statement II: Every transaction should have two sided effect to the extent of same amount.
Answer: (D)
2. Statement I: As per Accrual Basis ofAccounting incomes are credited to the period in which they are earned irrespective of the fact whether cash is received or not.
Statement II: Cash Basis ofAccounting are more scientific as compared to Accrual Basis and hence is preferred by accountants.
Answer: (A)
Short Answer Type-l Questions
1. Define the Business Entity concept.
Answer : The Business Entity Concept states that business is treated as a unit separate and distinct from its owners. Business transactions are recorded in the books of accounts from the viewpoint of the business. Owners are regarded as separate and distinct from the business and are treated as creditors of the business to the extent of their capital invested in the business. The capital is treated as a liability of the firm because it is assumed that the firm has borrowed funds from its own proprietors instead of borrowing it from outside parties.
2. Define the Money Measurement concept.
Answer : The Money Measurement Concept states that only those transactions and events that can be expressed in terms of money are recorded in the books of accounts of the enterprise. In other words, money is the common denominator in recording and reporting all transactions. Transactions or events, however important they may be, which cannot be measured in monetary terms, are not recorded in accounting.
3. Define Accounting Period concept. (Short Answer Type-l Questions)
Answer : The Accounting Period Concept, also known as the Periodicity Concept, states that the life of an enterprise is broken into smaller periods so that its performance can be measured at regular intervals. According to this concept, financial statements are prepared for a specific time period, typically a period of 12 months commencing from 1st April to 31st March. The main purpose of this concept is to determine the financial performance of the business during a particular time period.
4. Define Dual Aspect concept.
Answer : The Dual Aspect concept states that for every debit, there is a credit. Every transaction should have a two-sided effect to the extent of the same amount. This concept is the basis for double-entry accounting and has resulted in the Accounting Equation, which states that at any point in time, the assets of any entity must be equal (in monetary terms) to the total of the owner’s equity and outsider’s liabilities. This can be expressed in the form of an equation: Assets = Liabilities + Capital.
5. Who introduced the concept of Double Entry System?
Answer : The concept of Double Entry System was first introduced by Luca Pacioli in 1494 in Venice.
6. What is Cash Basis of Accounting?
Answer : Cash Basis of Accounting is a system in which transactions are recorded only when cash is actually received or paid, i.e., entry is not recorded when a payment or receipt is merely due. It means all incomes are considered to be earned only when they are actually received in cash. Likewise, expenses are considered to be incurred only when they are actually paid. The difference between the total incomes and total expenses represents profit or loss of a business for the accounting period.
Short Answer Type-ll Questions
1. What are Basic Accounting Concepts? Explain any two concepts.
Answer : Basic Accounting Concepts are the basic assumptions or fundamental propositions within which accounting operates. It is important to follow the accounting concepts in order to make the accounting information meaningful to its users.
Two of the concepts are:
(i) Business Entity Concept : According to the Business Entity Concept, business is treated as a unit separate and distinct from its owners. Business transactions, therefore, are recorded in the books of accounts from the viewpoint of the business. Owners being regarded as separate and distinct from business, are treated as creditors of the business to the extent of their capital invested by them in the business.
(ii) Money Measurement Concept : According to the Money Measurement Concept, only those transactions and events that can be expressed in the terms of money are recorded in the books of accounts of the enterprise. In other words, money is the common denominator in recording and reporting all transactions.
2. Write a short notes on:
(i) Accounting Period Concept?
Answer : The Accounting Period Concept, also known as the Periodicity Concept, states that the life of an enterprise is broken into smaller periods so that its performance can be measured at regular intervals. Financial statements are prepared for a specific time period, typically 12 months, commencing from 1st April to 31st March. The main purpose of this concept is to know the financial performance during a particular time period.
(ii) Dual Aspect Concept?
Answer : The Dual Aspect Concept states that every transaction should have two-sided effects to the extent of the same amount. This concept forms the basis of double-entry accounting and results in the Accounting Equation, which states that at any point in time, the assets of any entity must be equal (in monetary terms) to the total of the owner’s equity and outsider’s liabilities. This can be expressed in the form of an equation: Assets = Liabilities + Capital. Whenever a transaction is recorded, it has to be recorded in two or more accounts to balance the equation.
(iii) Going Concern Concept?
Answer : The Going Concern Concept implies that the business entity will continue its operations in the future and will not liquidate or be forced to discontinue operations due to any reason. According to International Accounting Standards, the enterprise is normally viewed as a going concern, meaning it is expected to continue operating indefinitely in the future. A company is considered a going concern if there is no evidence available to believe that it will stop its operations in the foreseeable future.
(iv) Money Measurement Concept?
Answer : The Money Measurement Concept states that only those transactions and events that can be expressed in terms of money are recorded in the books of accounts of the enterprise. In other words, money serves as the common denominator for recording and reporting all transactions. Transactions or events that cannot be measured in monetary terms, such as the skill, experience, or honesty of employees, are not recorded in the books of accounts because they are non-monetary transactions. In India, the rupee is the legal currency used as the unit of measurement.
3. What is Double Entry System of accounting? Explain two advantages and disadvantages.
Answer : The Double Entry System is a system of accounting under which every business transaction has two aspects—a debit aspect and a credit aspect. Every debit has a corresponding credit, and the total of all debits equals the total of all credits. For example, when a sale of goods is effected, cash is received, and goods are delivered out of stock. This transaction will record an increase in cash in hand and a decrease in the stock of goods. The two aspects of this transaction would be cash and goods, and entries would be recorded in both accounts. Because two separate entries are recorded in two separate accounts, it is called the double entry system.
Two advantages of the Double Entry System are:
(i) It is a scientific system of recording business transactions as compared to other systems of bookkeeping because transactions are recorded according to certain specified rules.
(ii) It provides a complete record of each and every transaction, resulting in showing correct income or loss, assets, and liabilities.
Two disadvantages of the Double Entry System are:
(i) It requires expert knowledge, as accounting is a profession practiced by qualified Chartered Accountants.
(ii) The process of recording, classifying, analyzing, and interpreting is lengthy and takes a long time to record transactions.
4. Explain Accrual basis of Accounting with advantages.
Answer : Accrual Basis of Accounting is a system in which incomes are credited to the period in which they are earned, irrespective of whether cash is received or not. For example, credit sales are recognized as sales regardless of whether the amount has been received. Similarly, expenses are charged to the period to which they relate, irrespective of whether cash has been paid or not. For instance, rent due to the landlord but not yet paid is still treated as an expense because it has become due. This basis follows the concept of realization and adheres to two fundamental accounting principles: revenue recognition and matching principle.
The advantages of Accrual Basis of Accounting are:
(i) It is more scientific compared to Cash Basis of Accounting and is therefore preferred by accountants.
(ii) It provides a complete picture of financial transactions as it considers all transactions related to a period along with adjustments like outstanding expenses, prepaid expenses, accrued income, and income received in advance.
(iii) It discloses the true profit or loss for a specific period and also reflects the true financial position of the business at the end of that period.
(iv) It helps present the true financial position of the business and thus enjoys wide acceptability.
(v) The Companies Act, 2013 recognizes the accrual basis of accounting.
Long Answer Type Questions
1. Explain Basic Accounting concepts. (Long Answer Type Questions)
Answer : Basic Accounting Concepts are the fundamental assumptions or propositions within which accounting operates. These concepts help make accounting information meaningful to its users. Below are the key Basic Accounting Concepts:
(i) Business Entity Concept : According to this concept, a business is treated as a unit separate and distinct from its owners. Business transactions are recorded in the books of accounts from the viewpoint of the business. Owners are regarded as separate from the business and are treated as creditors of the business to the extent of their capital invested. The capital is treated as a liability of the firm because it is assumed that the firm has borrowed funds from its proprietors instead of outside parties. Similarly, goods used by the proprietor for personal use are treated as drawings.
(ii) Money Measurement Concept : According to this concept, only those transactions and events that can be expressed in terms of money are recorded in the books of accounts. Money serves as the common denominator for recording all transactions. For example, if a firm has chairs, raw materials, and machines, these items must be expressed in monetary terms to be recorded systematically. Non-monetary transactions, such as the skill or honesty of employees, are not recorded.
(iii) Going Concern Concept : This concept implies that the business entity will continue its operations in the future and will not liquidate or discontinue operations due to any reason. A company is considered a going concern unless there is evidence suggesting it will stop operations in the foreseeable future.
(iv) Accounting Period Concept : Also known as the Periodicity Concept, this concept states that the life of an enterprise is broken into smaller periods so that its performance can be measured at regular intervals. Accounts are maintained under the assumption that the enterprise will continue its activities in the foreseeable future. Normally, financial statements are prepared for a period of 12 months, starting from 1st April to 31st March.
(v) Dual Aspect Concept : This concept states that every transaction has two aspects—a debit and a credit—and both must be recorded to maintain balance. It forms the basis for the double-entry system of accounting. The Accounting Equation derived from this concept is: Assets = Liabilities + Capital. Whenever a transaction occurs, it must be recorded in two or more accounts to ensure the equation remains balanced.
These concepts collectively ensure that accounting records are systematic, relevant, understandable, and homogeneous.
2. What is Double Entry system? Explain its disadvantages.
Answer : The Double Entry System is a system of accounting under which every business transaction has two aspects—a debit aspect and a credit aspect. Every debit has a corresponding credit, and the total of all debits equals the total of all credits. For example, when a sale of goods is effected, cash is received, and the goods are delivered out of stock. This transaction will record an increase in cash in hand and a decrease in the stock of goods. The two aspects of this transaction would be cash and goods, and entries would be recorded in both of these accounts. Because two separate entries are recorded in two separate accounts, it is called the double entry system.
The disadvantages of the Double Entry System are:
- Requirement of Expert Knowledge: Nowadays, accounting is a profession and is being practiced by qualified Chartered Accountants.
- Lengthy Process: The process of recording, classifying, analyzing, and interpreting is lengthy and takes a long time to record transactions.
- Expensive: The accounting department requires qualified and trained personnel for recording and maintaining the books of accounts, making it expensive to give high salaries to trained staff.
Extras
Additional questions and answers
1. What is the purpose of Generally Accepted Accounting Principles (GAAP)?
Answer : The purpose of Generally Accepted Accounting Principles (GAAP) is to provide accepted principles and concepts that businesses follow to maintain their books of accounts, avoiding confusion that would arise if every business adopted its own methods.
28. What adjustments are made under the Accrual Basis of Accounting when preparing financial statements?
Answer : Under the Accrual Basis of Accounting, adjustments are made for all outstanding and prepaid expenses, accrued incomes, and incomes received in advance while preparing financial statements. Outstanding Expenses are those expenses that have become due during the accounting period but have not yet been paid. Prepaid Expenses are those expenses that have been paid in advance. Accrued Income is income that has been earned during the accounting period but has not yet become due and, therefore, has not been received. Income Received in Advance is income that has been received before it has been earned, such as goods sold or services rendered. These adjustments ensure that revenues are credited to the period in which they are earned, irrespective of whether cash is received, and expenses are charged to the period to which they relate, regardless of whether cash has been paid.
Additional MCQs
1. Which concept treats business as separate from its owners?
A. Money Measurement Concept
B. Business Entity Concept
C. Going Concern Concept
D. Accounting Period Concept
Answer: B. Business Entity Concept
25. What is the equation for the Dual Aspect Concept?
A. Assets = Liabilities – Capital
B. Assets = Capital – Liabilities
C. Assets = Liabilities + Capital
D. Liabilities = Assets + Capital
Answer: C. Assets = Liabilities + Capital
Ron’e Dutta is a journalist, teacher, aspiring novelist, and blogger who manages Online Free Notes. An avid reader of Victorian literature, his favourite book is Wuthering Heights by Emily Brontë. He dreams of travelling the world. You can connect with him on social media. He does personal writing on ronism.
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