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Theory Base of Accounting

NCERT Class 11 · Accountancy Based on NCERT Class 11 Accountancy textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter establishes the theoretical foundation of accounting, explaining why a uniform set of principles, concepts, and standards is essential for reliable and comparable financial information. It introduces the Generally Accepted Accounting Principles (GAAP), details thirteen basic accounting concepts, and covers systems of accounting, bases of accounting, and accounting standards. The one big idea a student must walk away with is that accounting is not arbitrary; it is governed by a structured framework of concepts and standards that ensure consistency, objectivity, and meaningful communication of financial results to all stakeholders.
Key Concepts (23)
Generally Accepted Accounting Principles (GAAP)
The rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity in the preparation and the presentation of financial statements.
e.g. Recording all transactions on the basis of historical cost, which is verifiable from documents such as cash receipt for the money paid.
Business Entity Concept
The concept that assumes business has a distinct and separate entity from its owners. For accounting purposes, the business and its owners are treated as two separate entities.
e.g. When a person brings in money as capital into his business, in accounting records it is treated as liability of the business to the owner.
Money Measurement Concept
The concept that states only those transactions and happenings in an organisation which can be expressed in terms of money are to be recorded in the book of accounts. Records are kept in monetary unit, not physical units.
e.g. A factory on 2 acres of land, 30 computers, and 20 tons of raw material are all expressed in rupees and paise for accounting purposes.
Going Concern Concept
The concept that assumes a business firm would continue to carry out its operations indefinitely, i.e. for a fairly long period of time, and would not be liquidated in the foreseeable future.
e.g. A computer purchased for ₹50,000 with an estimated life of 5 years is depreciated ₹10,000 each year, not charged fully in the year of purchase.
Accounting Period Concept
The concept that refers to the span of time at the end of which the financial statements of an enterprise are prepared to know whether it has earned profits or incurred losses during that period and what is the position of its assets and liabilities.
e.g. Financial statements are prepared annually as required by the Companies Act 2013 and the Income Tax Act.
Cost Concept
The concept that requires all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use.
e.g. An old plant purchased for ₹50 lakh, with ₹10,000 transport, ₹15,000 repairs, and ₹25,000 installation, is recorded at ₹50,50,000.
Dual Aspect Concept
The concept that states every transaction has a dual or two-fold effect and should therefore be recorded at two places. At least two accounts will be involved in recording a transaction.
e.g. Ram invests ₹50,00,000 in business: cash (asset) increases by ₹50,00,000 and capital (owner's equity) increases by the same amount.
Revenue Recognition (Realisation) Concept
The concept that requires revenue for a business transaction should be included in the accounting records only when it is realised, i.e. when a legal right to receive it arises.
e.g. Credit sales are treated as revenue on the day sales are made, not when money is received from the buyer.
Matching Concept
The concept that states expenses incurred in an accounting period should be matched with revenues during that period. Revenue and expenses incurred to earn them must belong to the same accounting period.
e.g. Salaries, rent, insurance are recognised on the basis of the period to which they relate, not when paid.
Full Disclosure Concept
The concept that requires all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes.
e.g. The Indian Companies Act provides a format for profit and loss account and balance sheet to ensure proper disclosure.
Consistency Concept
The concept that requires accounting policies and practices followed by enterprises should be uniform and consistent over a period of time so that results are comparable.
e.g. If the method of depreciation changes between years, profit figures will not be comparable unless the change is disclosed.
Conservatism Concept (Prudence)
The concept that requires profits should not be recorded until realised but all losses, even those which may have a remote possibility, are to be provided for in the books of account.
e.g. Valuing closing stock at cost or market value whichever is lower; creating provision for doubtful debts.
Materiality Concept
The concept that requires accounting should focus on material facts. Efforts should not be wasted in recording and presenting facts which are immaterial in the determination of income.
e.g. Stock of erasers, pencils, scales are not shown as assets; the amount spent on stationery is treated as expense of that period.
Objectivity Concept
The concept that requires accounting transactions should be recorded in an objective manner, free from the bias of accountants and others, supported by verifiable documents or vouchers.
e.g. Purchase of materials is supported by cash receipt or invoice and delivery challan.
Double Entry System
A system of recording transactions based on the principle of 'Dual Aspect' which states that every transaction has two effects, viz. receiving of a benefit and giving of a benefit. Every debit must have a corresponding credit.
e.g. One account is debited and the other is credited for each transaction.
Single Entry System
An incomplete system of maintaining records of financial transactions that does not record two-fold effect of each and every transaction. Only personal accounts and cash book are maintained.
e.g. Small business firms use this system as it is simple and flexible.
Cash Basis of Accounting
Entries in the book of accounts are made when cash is received or paid and not when the receipt or payment becomes due.
e.g. Office rent for December 2014 paid in January 2015 is recorded only in January 2015.
Accrual Basis of Accounting
Revenues and costs are recognised in the period in which they occur rather than when they are paid. A distinction is made between receipt of cash and the right to receive cash.
e.g. Raw material consumed is matched against the cost of goods sold.
Accounting Standards
Written policy documents covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in financial statements, issued by ICAI.
e.g. Accounting standards eliminate non-comparability of financial statements and enhance reliability.
Goods and Services Tax (GST)
A destination based tax on consumption of goods and services levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff.
e.g. Ramesh in Punjab sells goods to Seema in Punjab worth ₹10,000 at 18% GST: ₹900 CGST goes to Centre, ₹900 SGST goes to Punjab Government.
CGST (Central Goods and Services Tax)
The component of GST collected by the Central Government on intra-state supply of goods and services.
e.g. On an intra-state sale of ₹10,000 at 18% GST, 9% CGST = ₹900 goes to Central Government.
SGST (State Goods and Services Tax)
The component of GST collected by the State Government on intra-state supply of goods and services.
e.g. On an intra-state sale of ₹10,000 at 18% GST, 9% SGST = ₹900 goes to State Government.
IGST (Integrated Goods and Services Tax)
The component of GST levied on inter-state supply of goods and services, with revenue divided between Central and State Governments.
e.g. Goods transferred from Madhya Pradesh to Rajasthan attract IGST.
Formulas & Equations (1)
Assets = Liabilities + Capital
Reads as: Assets equals Liabilities plus Capital
Variables: Assets: economic resources owned by the business (in ₹); Liabilities: claims of outsiders (in ₹); Capital: owner's claim or equity (in ₹)
Use when: To express the dual aspect concept; to check the equality of the accounting equation after every transaction; to prepare the balance sheet.
⚠ Students often forget that capital is also a claim (owner's equity) and write it as a separate item not part of the equation, or they incorrectly add capital to assets instead of liabilities.
How It Works
Recording a Transaction under the Dual Aspect Concept
  1. Identify the two accounts affected by the transaction.
  2. Determine which account receives the benefit (debit) and which gives the benefit (credit).
  3. Record the transaction in the journal with a debit entry and a corresponding credit entry of equal amount.
  4. Post the entries to the respective ledger accounts.
  5. Verify that the fundamental accounting equation (Assets = Liabilities + Capital) remains balanced.
💡 Every transaction must affect at least two accounts; the total debits must always equal total credits.
Revenue Recognition under Accrual Basis
  1. Identify the point at which a legal right to receive revenue arises (e.g., when goods are sold or service is rendered).
  2. Record the revenue in the books at that point, regardless of when cash is received.
  3. For credit sales, record revenue on the sale date, not on the collection date.
  4. For income like rent, commission, interest, recognise on a time basis (e.g., rent for March recognised in March even if received in April).
  5. For long-term contracts (e.g., construction), recognise proportionate revenue based on the part of contract completed by the end of the period.
💡 Revenue is recognised when earned, not when cash is received. Exceptions exist for long-term contracts and hire purchase.
Matching Concept Application
  1. Identify all revenues earned during the accounting period.
  2. Identify all expenses incurred to earn those revenues during the same period.
  3. Match the expenses against the revenues, ensuring both belong to the same accounting period.
  4. Recognise expenses not when cash is paid, but when an asset or service has been used to generate revenue.
  5. For cost of goods sold, consider only the cost of goods sold during the year, not all goods produced or purchased.
💡 Revenue and expenses must belong to the same accounting period. Unsold goods' cost is deducted from cost of goods produced/purchased.
GST Application on Intra-State and Inter-State Supply
  1. Determine whether the supply is intra-state (within same state) or inter-state (between different states).
  2. If intra-state: apply CGST (Central component) and SGST (State component) at equal rates (e.g., 9% each for 18% total).
  3. If inter-state: apply IGST at the combined rate (e.g., 18%).
  4. Collect the tax from the buyer and remit to the appropriate government: CGST and SGST to Centre and State respectively for intra-state; IGST to Centre for inter-state.
  5. Allow input tax credit for taxes paid at previous stages so that only value addition is taxed.
💡 GST is a destination-based tax; the tax accrues to the taxing authority with jurisdiction over the place of consumption (place of supply).
Exam Traps — Don't Make These Mistakes
⚠ Confusing Business Entity Concept with Personal Transactions
✗ The owner's personal assets are included in the business balance sheet.
→ The business entity concept treats the business and owner as separate entities; personal assets and liabilities of the owner are not recorded in the business books.
✓ The business has a distinct and separate entity from its owners. Personal assets and liabilities of the owner are not considered while recording and reporting the assets and liabilities of the business.
⚠ Misapplying Revenue Recognition to Credit Sales
✗ Revenue from credit sales is recognised when cash is received from the customer.
→ The realisation concept states revenue is recognised when a legal right to receive it arises, i.e., at the point of sale, not when cash is received.
✓ Revenue from credit sales is recognised on the day sales are made, when the legal right to receive payment arises, not when money is actually received.
⚠ Confusing Cost Concept with Market Value
✗ Assets are recorded at their current market value in the books of accounts.
→ The cost concept requires assets to be recorded at their historical purchase price (including acquisition, transportation, installation costs), not at market value.
✓ Assets are recorded in the books at their purchase price, which includes cost of acquisition, transportation, installation, and making the asset ready to use. This historical cost does not change year after year.
⚠ Misunderstanding Conservatism as Understating Everything
✗ Conservatism means we should always understate profits and assets deliberately.
→ While conservatism requires providing for all anticipated losses and not recognising unrealised gains, deliberate underestimation of asset values is discouraged as it leads to hidden profits (secret reserves).
✓ Conservatism requires that profits should not be recorded until realised, but all losses, even those with a remote possibility, should be provided for. However, deliberate underestimation of asset values is discouraged.
⚠ Confusing Cash Basis with Accrual Basis
✗ Under accrual basis, revenue is recorded when cash is received.
→ Under accrual basis, revenue is recognised when earned (when the transaction occurs), not when cash is received. Cash basis records revenue only when cash is received.
✓ Under accrual basis, revenues and costs are recognised in the period in which they occur, not when cash is paid or received. Under cash basis, entries are made only when cash is received or paid.
⚠ Misstating the Dual Aspect Equation
✗ Assets = Capital - Liabilities
→ The correct fundamental accounting equation is Assets = Liabilities + Capital. The claims on assets are from outsiders (liabilities) and owners (capital).
✓ The duality principle is expressed as: Assets = Liabilities + Capital. This means the assets of a business are always equal to the claims of owners and outsiders.
Compare & Contrast
Timing of recognition of revenue and expenses
Cash Basis of Accounting
Accrual Basis of Accounting
Under cash basis, entries are made when cash is received or paid; under accrual basis, revenues and costs are recognised in the period they occur, regardless of cash movement.
Completeness of recording transactions
Double Entry System
Single Entry System
Double entry system records both aspects of every transaction (dual effect) and is complete and reliable; single entry system does not record two-fold effect of all transactions, is incomplete and unsystematic.
Approach to uncertainty in accounting
Conservatism (Prudence)
Objectivity
Conservatism requires providing for all anticipated losses and ignoring unrealised gains; objectivity requires recording transactions based on verifiable evidence, free from bias.
What is recorded and at what value
Cost Concept
Money Measurement Concept
Cost concept specifies that assets are recorded at their historical purchase price; money measurement concept specifies that only transactions expressible in monetary terms are recorded, and in monetary units.
Exam Focus
Marks pattern: 2-3 MCQs (1 mark each), 1-2 Very Short Answer Questions (1-2 marks), 1 Short Answer Question (3 marks), 1 Long Answer Question (5-6 marks) — typically on concepts with examples or comparison of bases/systems.
Most asked: Business Entity Concept · Money Measurement Concept · Going Concern Concept · Dual Aspect Concept and Accounting Equation · Revenue Recognition (Realisation) Concept · Matching Concept · Conservatism (Prudence) Concept · Consistency Concept · Accrual Basis vs Cash Basis · Accounting Standards and GAAP
Don't skip: Explain any five basic accounting concepts with examples (5-6 marks); Distinguish between Cash Basis and Accrual Basis of Accounting (3 marks); State the fundamental accounting equation and explain the dual aspect concept with an example (3-5 marks); Explain the concept of Conservatism with examples (3 marks); What is GAAP? Explain any three accounting concepts (5 marks)
One-Line Revision (read aloud before the exam)
  1. GAAP refers to the rules or guidelines adopted for recording and reporting business transactions to bring uniformity in financial statements.
  2. Business Entity Concept treats the business and its owners as two separate entities for accounting purposes.
  3. Money Measurement Concept states that only transactions expressible in monetary terms are recorded in the books.
  4. Going Concern Concept assumes a business will continue its operations indefinitely and will not be liquidated in the near future.
  5. Accounting Period Concept requires financial statements to be prepared at regular intervals, normally one year.
  6. Cost Concept requires all assets to be recorded at their historical purchase price, including acquisition and installation costs.
  7. Dual Aspect Concept states every transaction has a two-fold effect and is recorded using the equation: Assets = Liabilities + Capital.
  8. Revenue Recognition Concept requires revenue to be recorded when a legal right to receive it arises, not when cash is received.
  9. Matching Concept requires expenses of a period to be matched with the revenues earned in that same period.
  10. Full Disclosure Concept requires all material and relevant facts to be fully disclosed in financial statements and footnotes.
  11. Consistency Concept requires the same accounting methods to be used from one period to the next for comparability.
  12. Conservatism (Prudence) Concept requires providing for all anticipated losses but not recognising unrealised gains.
  13. Materiality Concept states that accounting should focus on material facts; immaterial items can be treated as expenses.
  14. Objectivity Concept requires accounting transactions to be supported by verifiable documents and free from bias.
  15. Under Accrual Basis, revenues and costs are recognised when they occur; under Cash Basis, they are recognised when cash is received or paid.
  16. Accounting Standards are written policy documents issued by ICAI to bring uniformity in accounting policies and enhance comparability.
  17. GST is a destination-based tax on consumption, levied as CGST and SGST for intra-state and IGST for inter-state supplies.
  18. The fundamental accounting equation is Assets = Liabilities + Capital.
  19. Double Entry System records both aspects of every transaction; Single Entry System is incomplete and records only personal accounts and cash book.
  20. Revenue is the gross inflow of cash from sale of goods, services, or use of enterprise resources yielding interest, royalties, and dividends.

MCQs — 10 Questions with Answers

Q1. Which of the following best explains the purpose of Generally Accepted Accounting Principles (GAAP)?

  • A. To maximize profit of the business
  • B. To bring uniformity and consistency in recording and reporting of financial transactions ✓
  • C. To reduce the number of accounting entries
  • D. To eliminate the need for auditing

Answer: B — GAAP exists specifically to ensure uniform and consistent accounting practices across different firms and time periods, making financial statements comparable and reliable.

Q2. Mr. Sharma owns a shop and brings ₹50,000 from his personal savings as capital. Under Business Entity Concept, how is this recorded in the books?

  • A. Debit Cash, Credit Owner's Personal Account
  • B. Debit Cash, Credit Capital (treating business and owner as separate entities) ✓
  • C. Debit Inventory, Credit Capital
  • D. Debit Expense, Credit Cash

Answer: B — Business Entity Concept treats the business as a separate entity from its owner; capital brought in is recorded as a liability of the business to the owner.

Q3. Which concept states that only transactions that can be expressed in monetary terms should be recorded in books of accounts?

  • A. Going Concern Concept
  • B. Money Measurement Concept ✓
  • C. Consistency Concept
  • D. Objectivity Concept

Answer: B — Money Measurement Concept restricts accounting records to events and transactions that can be quantified in monetary units, excluding qualitative matters like employee morale.

Q4. A business purchases machinery for ₹1,00,000 on 1st January. The machinery's market value increases to ₹1,20,000 by year-end. At what value should machinery be shown in the Balance Sheet under Cost Concept?

  • A. ₹1,00,000 (historical cost) ✓
  • B. ₹1,20,000 (market value)
  • C. ₹1,10,000 (average of both)
  • D. ₹90,000 (conservative approach)

Answer: A — Cost Concept requires recording assets at historical cost (₹1,00,000), which is verifiable from purchase documents; increases in market value are not recognized in accounts.

Q5. Which journal entry violates the Dual Aspect Concept?

  • A. Dr. Cash ₹5,000 / Cr. Capital ₹5,000
  • B. Dr. Equipment ₹10,000 / Cr. Cash ₹10,000
  • C. Dr. Cash ₹8,000 / Cr. Sales ₹5,000 ✓
  • D. Dr. Rent Expense ₹3,000 / Cr. Cash ₹3,000

Answer: C — Dual Aspect requires equal debit and credit totals; here debits (₹8,000) and credits (₹5,000) do not match, violating the fundamental accounting equation.

Q6. A company sold goods on credit for ₹50,000 on 28th March but received payment on 2nd April. Under Revenue Recognition Concept, in which month's financial statements should this sale be recorded?

  • A. March (when sale took place) ✓
  • B. April (when cash was received)
  • C. Spread equally between March and April
  • D. Deferred to next financial year

Answer: A — Revenue Recognition Concept records income when earned (28th March), not when cash is received; cash receipt date is irrelevant for income recognition.

Q7. Which of the following is NOT a basic accounting concept?

  • A. Going Concern
  • B. Matching
  • C. Cost Reduction ✓
  • D. Consistency

Answer: C — Cost Reduction is a business objective, not an accounting concept; the 13 basic accounting concepts include Going Concern, Matching, and Consistency but not cost reduction.

Q8. A company discovers a possible bad debt of ₹2,000 at year-end but does not know if it will materialize. Which concept guides the company to create a provision now?

  • A. Going Concern Concept
  • B. Revenue Recognition Concept
  • C. Conservatism (Prudence) Concept ✓
  • D. Objectivity Concept

Answer: C — Conservatism Concept requires immediate recognition of potential losses and liabilities (provision for bad debt) even before they are certain, preventing overstatement of assets.

Q9. A firm uses Straight Line Method (SLM) for depreciation in Year 1 and Written Down Value (WDV) Method in Year 2. Which concept is violated? (A) Consistency, (B) Going Concern, (C) Matching, (D) Objectivity

  • A. Consistency ✓
  • B. Going Concern
  • C. Matching
  • D. Objectivity

Answer: A — Consistency Concept requires using the same accounting methods year after year; changing depreciation methods between years violates this concept and makes year-on-year comparisons unreliable.

Q10. Two friends open a retail store. Friend A works full-time but receives no salary; Friend B contributes ₹50,000 capital but does not work. Under Business Entity Concept, which statement is correct? (A) Friend A's labour value must be recorded as an asset, (B) Only Friend B's monetary contribution is recorded; Friend A's labour is not quantified in books, (C) Both contributions are equal in accounting records, (D) Neither contribution affects the business books

  • A. Friend A's labour value must be recorded as an asset
  • B. Only Friend B's monetary contribution is recorded; Friend A's labour is not quantified in books ✓
  • C. Both contributions are equal in accounting records
  • D. Neither contribution affects the business books

Answer: B — Business Entity and Money Measurement Concepts together allow only monetary transactions; Friend A's labour (non-monetary) is excluded from accounting records even though it has economic value.

Flashcards

What does GAAP stand for and why is it needed?

Generally Accepted Accounting Principles—rules that bring uniformity, consistency, and reliability to financial statements so users can compare and trust the information.

Define Business Entity Concept with one example.

Business and owner are separate entities; when owner brings ₹10,000 capital, it is recorded as business liability, not as owner's personal asset.

What does Money Measurement Concept exclude from accounting records?

Transactions that cannot be expressed in monetary terms, such as appointment of a manager, employee morale, or company's reputation.

State the Going Concern Concept in one sentence.

The business is assumed to continue indefinitely unless there is evidence to the contrary, so assets are valued as if the firm will operate permanently.

What is the Dual Aspect Concept? Give the equation.

Every transaction has two equal and opposite effects; Assets = Liabilities + Capital is the fundamental accounting equation.

Distinguish between Revenue Recognition and Matching Concept.

Revenue Recognition records income when earned (not when cash received); Matching pairs expenses with corresponding revenues in the same period.

Define Conservatism (Prudence) Concept with one accounting decision.

Recognize losses and liabilities immediately, but delay recognition of gains and assets; for example, provide for bad debts even before they occur.

Why is Consistency Concept important for financial analysis?

Using the same accounting methods every year allows users to compare a firm's performance across periods without distortion from changing accounting practices.

What does Full Disclosure Concept require in financial statements?

All material information that could influence users' decisions must be revealed in financial statements, notes, and disclosures—nothing is hidden.

Who is ICAI and what is its role in Indian accounting?

Institute of Chartered Accountants of India is the regulatory body that issues Accounting Standards to ensure uniformity and consistency in accounting practices across the country.

Important Board Questions

Define the Going Concern Concept and explain with one practical example how it affects the valuation of assets in the balance sheet. [2 marks]

Going Concern assumes business continues indefinitely. Example: machinery valued at original cost (not scrap value) because firm will use it, not sell it immediately. This affects depreciation calculation and asset presentation.

Explain the difference between Revenue Recognition Concept and Matching Concept. Provide a journal entry example for each to show how they work differently in accounting. [5 marks]

Revenue Recognition records income when earned (sale date), not cash date. Matching pairs expenses with revenues in same period. Example entry for Revenue Recognition: Dr. Debtors / Cr. Sales (on credit sale date). Example for Matching: Dr. COGS Expense / Cr. Purchases (when goods sold, not bought).

A company prepares financial statements following various accounting concepts. It uses Historical Cost for assets, creates provisions for bad debts without certainty, and applies the same depreciation method every year. Identify which three concepts are being followed and explain why each is essential for users like investors and creditors to make reliable decisions. [6 marks]

Three concepts: (1) Cost Concept—assets at historical cost (verifiable, objective). (2) Conservatism—provisions for uncertain losses (prevents asset overstatement, protects creditors). (3) Consistency—same methods yearly (allows inter-period comparison, builds user confidence). Show how each addresses user needs: investors need comparable data over time; creditors need prudent asset values to assess safety of loans.

Assertion-Reason Questions for Theory Base of Accounting

Q1. Assertion (A):

The Business Entity Concept treats the business and its owner as two distinct entities for accounting purposes.

Reason (R):

Under this concept, when an owner brings capital into the business, it is recorded as a liability of the business to the owner, not as the owner's personal investment.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true. The reason correctly explains why the assertion is valid—by treating them as separate entities, capital becomes a liability of the business entity, justifying this conceptual distinction.

Q2. Assertion (A):

The Conservatism Concept requires accountants to anticipate all possible losses and recognize them immediately.

Reason (R):

This approach prevents the understatement of liabilities and overstatement of assets, which could mislead financial statement users.

Answer: B — Both A and R are true, but R is NOT the correct explanation of A — The assertion is true (Conservatism does require recognizing losses immediately), but the reason is not the correct explanation. The primary purpose is to prevent overstatement of assets and income, not understatement of liabilities. A better reason would be preventing overstated profits and asset values.

Q3. Assertion (A):

The Money Measurement Concept restricts the scope of accounting information.

Reason (R):

Only transactions that can be expressed in monetary terms are recorded in the books of accounts, excluding qualitative factors like employee efficiency or management competence.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both statements are true, and the reason correctly explains the assertion. The Money Measurement Concept deliberately limits accounting records to monetary transactions, which is why important non-monetary factors are excluded from formal accounting records.

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Case-Based Questions (CBQ) for Theory Base of Accounting

Case Study:

Mr. Arvind started a trading business on 1st April 2024 with cash ₹2,00,000, furniture ₹50,000, and a bank loan of ₹1,00,000. During the year, he purchased goods worth ₹3,00,000 on credit from Sunil Traders and paid rent ₹24,000 by cheque. On 31st March 2025, his total assets were ₹6,50,000 and total liabilities (excluding capital) were ₹1,50,000.

Q1. According to the accounting equation, what is Mr. Arvind's capital as on 31st March 2025?

  • A. ₹6,50,000
  • B. ₹5,00,000 ✓
  • C. ₹3,00,000
  • D. ₹4,00,000

Answer: B

Q2. Which accounting concept is applied when the rent paid by cheque is recorded as an expense, reducing the profit?

  • A. Going Concern Concept
  • B. Accrual Concept ✓
  • C. Money Measurement Concept
  • D. Dual Aspect Concept

Answer: B

Q3. The purchase of goods on credit from Sunil Traders increases which account?

  • A. Cash Account
  • B. Capital Account
  • C. Creditors Account ✓
  • D. Furniture Account

Answer: C

Q4. If Mr. Arvind had recorded the furniture as an expense instead of an asset, which accounting principle would be violated?

  • A. Conservatism Principle
  • B. Historical Cost Principle
  • C. Revenue Recognition Principle
  • D. Matching Principle ✓

Answer: D

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Class 11 Accountancy Formula Sheet

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