Theory Base of Accounting
Take a notebook and pen first. Solve each question yourself, then pick an option. Only your first choice counts in the score, so do not rush.
Part A: MCQ (1 mark each)
- Going concern
- Business entity
- Money measurement
- Materiality
- FY 2027-28, when cash was received
- FY 2026-27, when the sale was made
- Both years equally
- Neither year until the customer confirms
- Conservatism concept
- Consistency concept
- Materiality concept
- Cost concept
- Conservatism
- Objectivity
- Matching
- Going concern
- ₹3,00,000
- ₹3,10,000
- ₹3,15,000
- ₹3,25,000
- CGST and SGST
- SGST only
- IGST
- CGST only
- SEBI
- Reserve Bank of India
- The Institute of Chartered Accountants of India
- GST Council
- Going concern
- Consistency
- Accrual
- Conservatism
Reason (R): Under the business entity concept, the business and its owner are treated as separate entities.
- Both Assertion (A) and Reason (R) are true, and R is the correct explanation of A.
- Both Assertion (A) and Reason (R) are true, but R is not the correct explanation of A.
- Assertion (A) is true, but Reason (R) is false.
- Assertion (A) is false, but Reason (R) is true.
Reason (R): Under the cash basis, entries are made only when cash is actually received or paid.
- Both Assertion (A) and Reason (R) are true, and R is the correct explanation of A.
- Both Assertion (A) and Reason (R) are true, but R is not the correct explanation of A.
- Assertion (A) is true, but Reason (R) is false.
- Assertion (A) is false, but Reason (R) is true.
Part B: Exam-style questions
Explain the money measurement concept. State one limitation of this concept.
Money measurement concept: Only those transactions and events that can be expressed in terms of money are recorded in the books of accounts. For example, a sale of goods for ₹20,000 is recorded, but the appointment of a capable manager or a strike by workers is not recorded.
Records are also kept in monetary units (₹), not physical units. Land in acres, stock in kg and computers in numbers cannot be added, but their rupee values can be added to find the total assets.
Limitation: The value of money changes over time because of rising prices. A building bought for ₹20 lakh in 2008 and a machine bought for ₹20 lakh in 2026 are added as if both rupees had equal value, so the books may not show a true and fair view.
When is revenue recognised under the revenue recognition concept? State two exceptions to the general rule. For Sharma Traders (year ending 31 March 2027), state whether each item is revenue of FY 2026-27: (a) an order of ₹40,000 received on 29 March 2027, goods delivered on 4 April 2027; (b) commission of ₹5,000 for March 2027 received on 10 April 2027.
Revenue is recognised when it is realised, i.e. when a legal right to receive it arises: when goods are sold or services are rendered, not when cash is received.
Exceptions: (i) In long-term contracts (e.g. construction), revenue in proportion to the work completed is recognised each year. (ii) In hire purchase sales, the amount collected in instalments is treated as realised.
(a) Not revenue of FY 2026-27. Goods were delivered in April 2027, so it is revenue of FY 2027-28. (b) Yes, revenue of FY 2026-27, because commission is recognised on a time basis and it relates to March 2027.
Gupta Electricals provides the following information for FY 2026-27: total sales ₹8,00,000 (cash ₹5,00,000; credit ₹3,00,000, of which ₹2,40,000 was collected during the year); expenses incurred ₹5,50,000, of which ₹50,000 is still outstanding; commission of ₹20,000 received in advance for FY 2027-28. Calculate the profit under (i) the cash basis and (ii) the accrual basis. Which figure is more appropriate and why?
(i) Cash basis:
Receipts = 5,00,000 + 2,40,000 + 20,000 = ₹7,60,000
Payments = 5,50,000 − 50,000 = ₹5,00,000
Profit = 7,60,000 − 5,00,000 = ₹2,60,000
(ii) Accrual basis:
Revenue earned = ₹8,00,000 (advance commission of next year is excluded)
Expenses incurred = ₹5,50,000
Profit = 8,00,000 − 5,50,000 = ₹2,50,000
The accrual basis profit of ₹2,50,000 is more appropriate, because it matches the revenue earned during the year with the expenses incurred to earn it (matching concept), while the cash basis depends only on the timing of cash flows.
What are Accounting Standards? State any two benefits and any two limitations of Accounting Standards.
Meaning: Accounting Standards are written policy documents issued by an expert accounting body (in India, the ICAI) covering the recognition, measurement, treatment, presentation and disclosure of accounting transactions in financial statements. Their aim is uniformity and comparability.
Benefits: (i) They eliminate variations in accounting treatment, so financial statements become uniform. (ii) They make statements comparable, both between enterprises and over years; they may also require useful disclosures not required by law.
Limitations: (i) They make the choice between alternative accounting treatments difficult and are applied rigidly. (ii) They cannot override the law; they must be framed within the existing statutes.
Pooja helped her father prepare the accounts of his shop "Pooja Electronics" for FY 2026-27. The bank refused to rely on them. Identify the concept violated in each case and give the correct treatment:
(a) The shop building bought for ₹18 lakh was shown at its present market value of ₹35 lakh.
(b) Last year stock was valued at cost; this year a different method was used without any disclosure, raising the stock value by about 12%.
(c) A laptop costing ₹90,000 with a useful life of 3 years was fully charged to this year's profit.
(d) Her father's household electricity bill of ₹4,000, paid from the shop's cash, was shown as the shop's expense.
(e) Goods costing ₹50,000 with a market value of ₹60,000 were shown at ₹60,000.
(f) An order of ₹25,000 received on 30 March 2027, to be delivered in April 2027, was included in sales.
(a) Cost concept (and objectivity): assets are recorded at historical cost. Show the building at ₹18 lakh (less depreciation), not at market value.
(b) Consistency concept: the same method should be followed every year; if changed, the change and its effect must be disclosed.
(c) Going concern / matching concept: the cost should be spread over the useful life, e.g. ₹30,000 per year for 3 years, not charged fully in one year.
(d) Business entity concept: it is the owner's personal expense; treat ₹4,000 as drawings, not as the shop's expense.
(e) Conservatism concept: unrealised gains are not recorded; show the stock at the lower of cost and market value, i.e. ₹50,000.
(f) Revenue recognition concept: an order is not a sale; revenue arises only on delivery in April 2027, so exclude ₹25,000 from sales of FY 2026-27.
Meena runs "Meena Mobiles" in Lucknow (Uttar Pradesh). GST rate on mobiles is 18%. In April 2026:
• She sold phones worth ₹20,000 to a customer in Kanpur (UP).
• She sold phones worth ₹30,000 to a dealer in Patna (Bihar).
• On 30 April she received an order for ₹15,000; the phones were delivered on 3 May.
• The shop's electricity bill for April, ₹2,000, was paid on 5 May.
(i) Calculate the GST on the sale to Kanpur, showing each component. (1)
(ii) Calculate the GST on the sale to Patna and name the tax. (1)
(iii) In which month is the ₹15,000 order revenue? Name the concept. (1)
(iv) In which month's profit will the ₹2,000 electricity bill be charged? Name the concept. (1)
(i) Intra-state sale: CGST = 9% of 20,000 = ₹1,800; SGST = 9% of 20,000 = ₹1,800.
(ii) Inter-state sale: IGST = 18% of 30,000 = ₹5,400.
(iii) May, when the phones were delivered: revenue recognition concept (an order is not a sale).
(iv) April, because the electricity was used in April to earn April's revenue: matching concept (accrual basis).
4 topper-level HOTS problems for this chapter, with hints and full solutions.