Theory Base of Accounting — Practice

Question 1

Which concept treats the business as separate from its owner?

Accepted Answer

The business entity concept.

✦ Answer: business entity concept.

Question 2

State the accounting equation from the dual-aspect concept.

Accepted Answer

Assets = Liabilities + Capital.

✦ Answer: Assets = Liabilities + Capital.

Question 3

Which basis of accounting records revenue only when cash is received?

Accepted Answer

The cash basis.

✦ Answer: cash basis.

Question 4

A firm buys a machine for ₹5,00,000; its market value is now ₹6,00,000. At what value is it shown and why?

Accepted Answer

Step 1 — By the cost concept, assets are recorded at acquisition cost.

Step 2 — So the machine is shown at ₹5,00,000 (less depreciation), not the ₹6,00,000 market value.

✦ Answer: ₹5,00,000 (cost concept).

Question 5

Explain the matching concept.

Accepted Answer

Step 1 — Expenses must be matched with the revenues they help earn in the same period.

Step 2 — This gives the correct profit or loss for the period (e.g. include outstanding rent).

✦ Answer: match period expenses with period revenues for correct profit.

Question 6

Differentiate cash and accrual bases of accounting.

Accepted Answer

Step 1 — Cash basis records transactions only on actual receipt/payment of cash.

Step 2 — Accrual basis records revenue when earned and expenses when incurred, regardless of cash.

✦ Answer: cash = on cash flow; accrual = on earning/incurring.

Question 7

Explain the going concern, prudence and consistency concepts.

Accepted Answer

Step 1 — Going concern: the business will continue, so assets are recorded at cost and depreciated.

Step 2 — Prudence: provide for all possible losses but not unrealised profits.

Step 3 — Consistency: use the same methods each period for comparability.

✦ Answer: continuity, caution against losses, and uniform methods respectively.

Question 8

Why are accounting standards and IFRS important?

Accepted Answer

Step 1 — They standardise the treatment of transactions, reducing arbitrary choices.

Step 2 — This makes financial statements reliable and comparable across firms.

Step 3 — IFRS/Ind AS extend comparability across countries.

✦ Answer: they ensure uniform, reliable and globally comparable reporting.

Question 9

What is GST and why does it avoid cascading?

Accepted Answer

Step 1 — GST is a single indirect tax on the supply of goods and services.

Step 2 — Input tax credit lets a seller deduct tax paid on inputs, so tax is not charged on tax (no cascading).

✦ Answer: a comprehensive indirect tax with input credit that removes tax-on-tax.

Practice — Theory Base of Accounting

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