Chapter theory-base-of-accounting: Theory Base of Accounting Application Questions | accountancy Class 11 CBSE

Chapter theory-base-of-accounting: Theory Base of Accounting Application Questions | accountancy Class 11 CBSE | ByteNotes.in

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 1

Applied Concept

Ritu, a sole proprietor, uses her business car for personal trips and charges the petrol cost to the business. Her accountant corrects this. Which accounting concept is being applied, and why is this correction necessary?

The Business Entity Concept is being applied. It treats the business and the owner as two distinct entities; personal expenses of the owner must not be recorded in the business books.
Charging personal petrol costs to the business overstates expenses and reduces the reported profit, distorting the true financial performance of the business.
The accountant is correct to reverse this entry; only transactions that involve inflow or outflow of business funds should be recorded in the business books.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 2

Applied Concept

Anand purchased a machine for Rs. 5,00,000 in 2018. In 2025, its market value is Rs. 9,00,000. His accountant continues to show it at Rs. 5,00,000 in the books. Which concept supports this, and what is its limitation?

The Cost Concept supports this treatment; assets are recorded at historical purchase price and the recorded value does not change even when market value increases.
Historical cost is objective and verifiable from purchase documents, unlike market value which is subjective and may vary from time to time and person to person.
The limitation is that the balance sheet does not reflect the true worth of the business; during rising prices, assets are undervalued, leading to hidden profits that are not apparent from the books.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 3

Applied Concept

A firm receives advance rent for April 2026 in March 2026. Its accountant includes this in the income of the year ending March 2026. Is this treatment correct? Which concept is being violated?

This treatment is incorrect. The advance rent received in March 2026 for April 2026 belongs to the financial year beginning April 2026, not the year ending March 2026.
The Revenue Recognition Concept is being violated; revenue should be recognised when the right to earn it arises—here, the service (occupancy) is due in April 2026.
To correct this, the advance rent should be treated as income received in advance (a liability) in the year ending March 2026 and recognised as income in April 2026.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 4

Applied Concept

With reference to the Matching Concept, explain whether salary paid for December 2025 in January 2026 should be recorded as an expense of December 2025 or January 2026.

Under the Matching Concept, salary for December 2025 is an expense of December 2025 because expenses must be matched against the revenues earned in the period they relate to.
The fact that cash is paid in January 2026 is irrelevant; the accrual basis requires the expense to be recognised in the period the service is received, not when cash is paid.
The salary should be shown as 'outstanding salary' (a liability) at the end of December 2025 and charged to the profit and loss account for that period, not January 2026.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 5

Applied Concept

Priya's business holds closing stock that cost Rs. 50,000 but its current market value is Rs. 40,000. Her accountant values it at Rs. 40,000. Which concept is being applied, and what would happen if the market value had risen to Rs. 60,000?

The Conservatism (Prudence) Concept is applied; it requires stock to be valued at cost or market value, whichever is lower, to avoid overstating assets and profits.
Valuing at Rs. 40,000 (market value, being lower) reflects the anticipated loss of Rs. 10,000 in the current period, protecting the interests of creditors.
If market value had risen to Rs. 60,000, the stock would still be shown at cost (Rs. 50,000); the unrealised gain of Rs. 10,000 would not be recorded until the stock is actually sold.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 6

Applied Concept

Ruchica's father's accountant showed a building purchased for Rs. 7 lakh at its current market value of Rs. 20 lakh. A banker was suspicious of this. Identify the concept violated and advise Ruchica.

The Cost Concept is violated; all assets must be recorded at their historical cost, not at current market value, to ensure objectivity and verifiability.
Recording the building at market value (Rs. 20 lakh) overstates assets by Rs. 13 lakh and may give a misleading picture of the firm's financial position to lenders.
Ruchica should correct the entry by restoring the building's value to Rs. 7 lakh (historical cost) in the books; this will make the financial statements objective and acceptable to the banker.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 7

Applied Concept

With reference to the Consistency Concept, explain why a firm that changes its method of depreciation from straight-line to written-down value must disclose this change.

The Consistency Concept requires that the same accounting method be applied consistently across periods so that financial results remain comparable from year to year.
A change in depreciation method affects the amount charged to the profit and loss account, altering reported profit; without disclosure, users would be misled into making incorrect comparisons.
Any change in accounting policy must be fully disclosed in the financial statements along with its probable effect on the financial results, so that users can adjust their analysis accordingly.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 8

Applied Concept

A trader faces a court case where the customer is likely to win and the trader will have to pay damages of an uncertain amount. The accountant advises not to record this loss since the amount is uncertain. Is the accountant right?

The accountant is wrong. The Conservatism Concept requires that all anticipated losses—even those with only a remote possibility—must be provided for in the books of account.
The fact that the exact amount is uncertain does not eliminate the obligation to record a provision; an estimated amount should be provided as a contingent liability or provision.
Not recording this loss would overstate profits for the year, potentially resulting in dividend distribution from capital, which harms creditors and violates the principle of prudence.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 9

Applied Concept

Ruchica's father's accountant charged the entire cost of a personal computer (Rs. 70,000, expected life 5 years) to the current year's profit. Identify the concept violated and what should have been done.

The Going Concern Concept (along with the Matching Concept) is violated; the computer will be used over 5 years and only the portion consumed in the current year should be charged as expense.
The correct treatment is to depreciate the computer over its 5-year life, charging Rs. 14,000 per year to the profit and loss account and carrying the remaining value forward as an asset.
Charging the full Rs. 70,000 in one year understates profit and overstates expenses for that year while understating them for subsequent years, distorting the financial results.

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 10

Applied Concept

Ruchica's father's accountant changed the method of stock valuation, resulting in stock being valued 15% higher than last year. How does this affect financial statements, and which concept is violated?

The Consistency Concept is violated; changing the stock valuation method between periods makes the financial results of two years incomparable.
A higher stock value reduces cost of goods sold and inflates gross profit by approximately 15%, giving a misleadingly favourable picture of the current year's performance.
The change must be disclosed clearly in the financial statements along with its effect on profit, so that users can adjust their comparison with the previous year's figures.

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Chapter theory-base-of-accounting: Theory Base of Accounting | Application Questions

Ritu, a sole proprietor, uses her business car for personal trips and charges the petrol cost to the business. Her accountant corrects this. Which accounting concept is being applied, and why is this correction necessary?

Anand purchased a machine for Rs. 5,00,000 in 2018. In 2025, its market value is Rs. 9,00,000. His accountant continues to show it at Rs. 5,00,000 in the books. Which concept supports this, and what is its limitation?

A firm receives advance rent for April 2026 in March 2026. Its accountant includes this in the income of the year ending March 2026. Is this treatment correct? Which concept is being violated?

With reference to the Matching Concept, explain whether salary paid for December 2025 in January 2026 should be recorded as an expense of December 2025 or January 2026.

Priya's business holds closing stock that cost Rs. 50,000 but its current market value is Rs. 40,000. Her accountant values it at Rs. 40,000. Which concept is being applied, and what would happen if the market value had risen to Rs. 60,000?

Ruchica's father's accountant showed a building purchased for Rs. 7 lakh at its current market value of Rs. 20 lakh. A banker was suspicious of this. Identify the concept violated and advise Ruchica.

With reference to the Consistency Concept, explain why a firm that changes its method of depreciation from straight-line to written-down value must disclose this change.

A trader faces a court case where the customer is likely to win and the trader will have to pay damages of an uncertain amount. The accountant advises not to record this loss since the amount is uncertain. Is the accountant right?

Ruchica's father's accountant charged the entire cost of a personal computer (Rs. 70,000, expected life 5 years) to the current year's profit. Identify the concept violated and what should have been done.

Ruchica's father's accountant changed the method of stock valuation, resulting in stock being valued 15% higher than last year. How does this affect financial statements, and which concept is violated?

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