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Theory Base of Accounting – Class 11 Accountancy notes, important questions and MCQs

NCERT Class 11 Accountancy, chapter 2. Notes, key terms, important questions with answers and MCQs.

Chapter overview

Accounting follows a set of rules called Generally Accepted Accounting Principles (GAAP), made up of basic concepts and conventions, so that financial statements are uniform, reliable and comparable. Accounting Standards issued by the Institute of Chartered Accountants of India and Ind AS converged with international standards guide how transactions are treated.

Basic accounting concepts

Business entity: the business is separate from its owner, so capital is a liability of the business to the owner.
Money measurement: only transactions measurable in money are recorded.
Going concern: the business is assumed to continue for a long time, so assets are shown at cost less depreciation.
Accounting period: results are measured for a fixed period, usually one year.
Cost concept: assets are recorded at their purchase price; dual aspect: every transaction has two effects, so Assets = Liabilities + Capital.

More concepts and conventions

Revenue recognition: revenue is recognised when it is earned, not necessarily when cash is received.
Matching: expenses of a period are matched with the revenue of the same period.
Full disclosure, consistency, conservatism (prudence: anticipate no profit but provide for all possible losses), materiality and objectivity.

Systems, bases and standards

Systems: double entry system (both aspects recorded) and single entry system (incomplete records).
Bases: cash basis records only cash receipts and payments; accrual basis records revenues and expenses when they arise.
The Accounting Standards Board of ICAI was set up in 1977; Ind AS are converged with IFRS. GST is a destination-based indirect tax on goods and services.

Key terms

GAAP: generally accepted rules and principles followed in preparing accounts
Business entity concept: the principle that the business and its owner are separate entities
Dual aspect concept: the principle that every transaction affects two accounts, giving Assets = Liabilities + Capital
Matching concept: expenses are matched with the revenue of the same accounting period
Accrual basis: recording revenues and expenses when they are earned or incurred, not when cash moves

Important questions with answers

Explain the business entity concept.2 marks

According to the business entity concept, the business is treated as separate and distinct from its owner. Transactions are recorded from the point of view of the business, so the capital introduced by the owner is a liability of the business, and the owner's personal expenses are treated as drawings, not business expenses.

Distinguish between the cash basis and accrual basis of accounting.3 marks

Under the cash basis, revenues and expenses are recorded only when cash is actually received or paid, so outstanding expenses and accrued incomes are ignored. Under the accrual basis, revenues are recorded when earned and expenses when incurred, whether or not cash has moved. The accrual basis gives a truer picture of profit and is required for companies.

Explain any five basic accounting concepts with examples.5 marks

Accounting concepts are basic assumptions on which accounts are prepared. Under the business entity concept, the business is separate from its owner; for example, capital introduced by the owner is shown as a liability, and goods taken for personal use are drawings. Under the money measurement concept, only transactions measurable in money are recorded; the loyalty of staff or a strike threat is not recorded. Under the going concern concept, it is assumed the business will continue for a long time, so fixed assets are shown at cost less depreciation rather than at their sale value. Under the dual aspect concept, every transaction has two effects of equal amount; for example, buying furniture for cash increases furniture and decreases cash, keeping Assets = Liabilities + Capital true. Under the matching concept, expenses of a period are matched with revenues of the same period; for example, salary for March is charged to that year's profit and loss account even if paid in April. Other concepts include the accounting period, cost, revenue recognition, full disclosure, consistency, conservatism and materiality. Together they make accounts uniform, reliable and comparable.

Quick revision

Entity, money measurement, going concern, accounting period.
Cost, dual aspect, revenue recognition, matching.
Disclosure, consistency, conservatism, materiality, objectivity.
Double entry; cash vs accrual basis; ASB 1977; Ind AS.

Exam tips

For each concept, learn one practical example, such as capital shown as a liability (business entity).
Remember conservatism in one line: anticipate no profit, provide for all losses.

Practice MCQs

The concept that the business is separate from its owner is
1. going concern
2. business entity
3. cost
4. matching
Show answer
Answer: (b) business entity. Capital is shown as a liability.
Only transactions that can be measured in money are recorded under the
1. cost concept
2. money measurement concept
3. dual aspect concept
4. accrual concept
Show answer
Answer: (b) money measurement concept. Employee skill is not recorded.
The assumption that a business will continue for a long time is the
1. accounting period concept
2. materiality concept
3. going concern concept
4. consistency concept
Show answer
Answer: (c) going concern concept. Assets are shown at cost less depreciation.
The accounting equation Assets = Liabilities + Capital is based on the
1. money measurement concept
2. dual aspect concept
3. conservatism
4. matching concept
Show answer
Answer: (b) dual aspect concept. Each transaction has two effects.
Valuing closing stock at cost or market price, whichever is lower, follows
1. consistency
2. full disclosure
3. materiality
4. conservatism
Show answer
Answer: (d) conservatism. It avoids overstating profit.
The Accounting Standards Board of ICAI was constituted in
1. 1949
2. 1977
3. 1991
4. 2017
Show answer
Answer: (b) 1977. It formulates accounting standards.
Charging this year's salary to this year's revenue, even if paid next year, follows the
1. cost concept
2. matching concept
3. entity concept
4. money measurement concept
Show answer
Answer: (b) matching concept. Expenses match the revenue period.
Following the same method of depreciation year after year reflects
1. conservatism
2. objectivity
3. materiality
4. consistency
Show answer
Answer: (d) consistency. It allows comparison over time.

All chapters of Class 11 Accountancy

Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.