How to Use This Solutions Page
This page provides complete NCERT solutions for CBSE Class 11 Accountancy Chapter 2 — Theory Base of Accounting. Follow these steps for best results:
1. Read the NCERT textbook chapter first and understand each concept and convention. 2. Attempt every question on your own before reading the solution. 3. Compare your answer with the solution given here. 4. For accounting equation numericals, work out each transaction step by step — never skip intermediate steps. 5. Re-attempt wrong questions after one day without looking at the solution.
For concept-based questions, the definition is given first, followed by an example and significance. For distinction questions, a table format is used. For accounting equation numericals, the full working is shown.
Key Concepts Recap
Before solving the exercise, revise these key points:
- Six accounting concepts: Business Entity, Money Measurement, Going Concern, Accounting Period, Cost, Dual Aspect.
- Four accounting conventions: Conservatism, Consistency, Materiality, Full Disclosure.
- Three fundamental assumptions (GAAP): Going Concern, Consistency, Accrual.
- Accounting Equation: Assets = Liabilities + Capital (always balances).
- Accounting Standards: Issued by ASB of ICAI. Ensure uniformity and comparability.
- IFRS: Issued by IASB, followed globally. India is converging through Ind AS.
Intext Questions
Intext Question 1
Q: What is the business entity concept? Give an example.
The business entity concept states that the business is treated as a separate entity distinct from its owner. The accounts of the business are maintained from the business's point of view, not the owner's. The owner's personal transactions are not recorded in the business books. Capital contributed by the owner is treated as a liability of the business to the owner.
Example: If Ms Priya starts a business by investing Rs 3,00,000, the business records Rs 3,00,000 as capital (liability to Priya) and Rs 3,00,000 as cash (asset). If Priya uses Rs 10,000 from business cash to pay her personal electricity bill, this is recorded as a drawing — it reduces capital, not as a business expense.
Intext Question 2
Q: What is the money measurement concept?
The money measurement concept states that only those transactions and events that can be expressed in monetary terms are recorded in the books of accounts. Qualitative aspects like management quality, employee morale, or brand loyalty are not recorded because they cannot be measured in money.
Example: A firm has 100 experienced workers. Their experience cannot be recorded in the books, but their total salary of Rs 20,00,000 per month can be.
Intext Question 3
Q: State the accounting equation.
The accounting equation is:
Assets = Liabilities + Capital
This equation is based on the dual aspect concept. It must always balance because every transaction affects at least two accounts in such a way that the equality is maintained.
Intext Question 4
Q: What are the three fundamental accounting assumptions?
The three fundamental accounting assumptions are:
1. Going Concern: The business will continue to operate in the foreseeable future. 2. Consistency: Accounting policies are applied consistently from one period to another. 3. Accrual: Revenue and expenses are recognised when earned or incurred, not when cash is received or paid.
Intext Question 5
Q: What is the convention of conservatism?
The convention of conservatism (also called the prudence concept) states: "Anticipate no profit, but provide for all possible losses." This means accountants should not record unrealised gains but should provide for all expected losses.
Application: Creating provision for doubtful debts, valuing closing stock at cost or market price whichever is lower, not recording anticipated gains until realised.
Chapter-End Exercise Questions
Exercise Question 1
Q: Explain the following accounting concepts with examples:
(a) Business Entity Concept
Example: If an owner invests Rs 5,00,000, the business records it as Capital A/c (liability) and Cash A/c (asset). If the owner takes Rs 10,000 for personal use, it is recorded as Drawings A/c Dr. and Cash A/c Cr. — not as a business expense.
(b) Money Measurement Concept
Example: A firm's reputation for quality is not recorded, but the advertising expense of Rs 50,000 to build that reputation is recorded.
(c) Going Concern Concept
Example: Because of this concept, fixed assets are depreciated over their useful life rather than written off immediately, and prepaid expenses are carried forward as assets.
(d) Accounting Period Concept
Example: A company prepares financial statements for the year April 1, 2024 to March 31, 2025, even though the business will continue beyond this date.
(e) Cost Concept
Example: Land purchased for Rs 3,00,000 is shown at Rs 3,00,000 in the Balance Sheet even if its market value has risen to Rs 15,00,000.
(f) Dual Aspect Concept
Example: When a business borrows Rs 50,000 from a bank, Cash (asset) increases by Rs 50,000 and Bank Loan (liability) increases by Rs 50,000. The equation balances.
Exercise Question 2
Q: Distinguish between accounting concepts and accounting conventions.
| Basis | Accounting Concepts | Accounting Conventions |
|---|---|---|
| Nature | Theoretical postulates or assumptions | Customs or traditions developed through practice |
| Origin | Derived from accounting theory | Developed through common usage over time |
| Authority | Based on logical reasoning | Based on accepted practice and convenience |
| Flexibility | Less flexible — must be followed | More flexible — can be adapted based on circumstances |
| Examples | Business Entity, Money Measurement, Going Concern, Cost, Dual Aspect | Conservatism, Consistency, Materiality, Full Disclosure |
| Legal backing | Often supported by law and standards | Generally accepted but not always legally mandated |
Exercise Question 3
Q: Explain the following accounting conventions with examples:
(a) Convention of Conservatism
Example: If a debtor owes Rs 20,000 and there is doubt about recovery, a provision for doubtful debts is created. But if the same debtor is expected to pay Rs 21,000, the extra Rs 1,000 is not recorded until actually received.
(b) Convention of Consistency
Example: If a company uses the straight-line method of depreciation, it should continue using it year after year. If it switches to the written-down value method, this change must be disclosed.
(c) Convention of Materiality
Example: A calculator costing Rs 300 may be treated as an expense (immaterial) even though it is technically an asset. But a building costing Rs 20,00,000 must be disclosed as a separate fixed asset.
(d) Convention of Full Disclosure
Example: Contingent liabilities (e.g., a pending lawsuit for Rs 10,00,000) are disclosed as a footnote in financial statements even though they are not recorded in the books.
Exercise Question 4
Q: What are accounting standards? Why are they needed?
Accounting standards are written policy documents issued by expert accounting bodies that provide uniform guidelines for the preparation and presentation of financial statements. In India, accounting standards are issued by the Accounting Standards Board (ASB) of ICAI.
Why accounting standards are needed:
1. Uniformity: Without standards, different firms would follow different policies, making comparison impossible. 2. Comparability: Standards enable comparison of financial statements across firms and across periods. 3. Reliability: Standards ensure that financial information is prepared using accepted methods, making it more reliable. 4. Transparency: Standards require disclosure of accounting policies and significant information. 5. Legal compliance: Standards help businesses comply with statutory requirements. 6. Investor confidence: Standardised financial reporting increases confidence among investors and creditors.
Exercise Question 5
Q: What is IFRS? How is India converging with IFRS?
IFRS (International Financial Reporting Standards) are accounting standards issued by the International Accounting Standards Board (IASB). They are followed in over 140 countries to bring uniformity in financial reporting globally.
India's convergence with IFRS: India is converging its accounting standards with IFRS through Ind AS (Indian Accounting Standards). The Ministry of Corporate Affairs (MCA) has notified the roadmap:
- Companies with net worth Rs 500 crore or more: Ind AS applicable from April 1, 2016.
- Listed and unlisted companies with net worth Rs 250 crore or more: Ind AS applicable from April 1, 2017.
India is converging (aligning) with IFRS, not fully adopting IFRS. Convergence means Ind AS are largely similar to IFRS but retain some India-specific modifications to suit local legal and economic requirements.
Exercise Question 6
Q: Show the effect of the following transactions on the Accounting Equation:
Ram started business with Rs 1,00,000 cash.
1. Purchased goods for cash Rs 30,000 2. Sold goods for cash Rs 40,000 (cost Rs 25,000) 3. Paid rent Rs 5,000 4. Purchased goods on credit from Shyam Rs 15,000 5. Paid to Shyam Rs 14,800 in full settlement
We start with: Assets = Liabilities + Capital
Equation: 1,00,000 = 0 + 1,00,000
| Opening: Cash = 1,00,000 | Liabilities = 0 | Capital = 1,00,000 |
|---|
After Transaction 1 (Purchased goods for cash Rs 30,000):
Equation: 70,000 + 30,000 = 0 + 1,00,000 → 1,00,000 = 1,00,000 (Balanced)
| Cash = 1,00,000 - 30,000 = 70,000 | Stock = 30,000 | Liabilities = 0 | Capital = 1,00,000 |
|---|
After Transaction 2 (Sold goods for cash Rs 40,000, cost Rs 25,000):
Equation: 1,10,000 + 5,000 = 0 + 1,15,000 → 1,15,000 = 1,15,000 (Balanced)
| Cash = 70,000 + 40,000 = 1,10,000 | Stock = 30,000 - 25,000 = 5,000 | Capital = 1,00,000 + Profit 15,000 = 1,15,000 |
|---|
After Transaction 3 (Paid rent Rs 5,000):
Equation: 1,05,000 + 5,000 = 0 + 1,10,000 → 1,10,000 = 1,10,000 (Balanced)
| Cash = 1,10,000 - 5,000 = 1,05,000 | Stock = 5,000 | Capital = 1,15,000 - 5,000 = 1,10,000 |
|---|
After Transaction 4 (Purchased goods on credit from Shyam Rs 15,000):
Equation: 1,05,000 + 20,000 = 15,000 + 1,10,000 → 1,25,000 = 1,25,000 (Balanced)
| Cash = 1,05,000 | Stock = 5,000 + 15,000 = 20,000 | Creditors = 15,000 | Capital = 1,10,000 |
|---|
After Transaction 5 (Paid to Shyam Rs 14,800 in full settlement of Rs 15,000):
Equation: 90,200 + 20,000 = 0 + 1,10,200 → 1,10,200 = 1,10,200 (Balanced)
| Cash = 1,05,000 - 14,800 = 90,200 | Stock = 20,000 | Creditors = 15,000 - 15,000 = 0 | Capital = 1,10,000 + 200 (discount received) = 1,10,200 |
|---|
Exercise Question 7
Q: Explain the accrual assumption with an example.
The accrual assumption states that revenue and expenses are recognised when they are earned or incurred, not when cash is received or paid. This means:
- Revenue is recorded in the period in which the sale occurs, even if cash is received later.
- Expenses are recorded in the period in which the benefit is consumed, even if cash is paid later.
Example: A business sells goods worth Rs 50,000 on credit on March 25, 2025. Cash is received on April 10, 2025. Under the accrual assumption, the revenue of Rs 50,000 is recorded in the year ending March 31, 2025 (when the sale occurred), not in the year 2025-26 (when cash was received).
Similarly, salary for March 2025 is paid in April 2025. Under the accrual assumption, the salary expense is recorded in March 2025 (when the service was consumed), not in April (when cash was paid).
Exercise Question 8
Q: Distinguish between Going Concern concept and Accounting Period concept.
| Basis | Going Concern Concept | Accounting Period Concept |
|---|---|---|
| Meaning | Business will continue for the foreseeable future | Business life is divided into artificial time periods |
| Purpose | To ensure assets are valued at cost (not liquidation value) | To measure profit/loss at regular intervals |
| Implication | Fixed assets are depreciated over useful life; liabilities classified as current/non-current | Financial statements are prepared at the end of each period; comparison across periods is possible |
| Timeframe | Indefinite (long-term assumption) | Definite (usually one year) |
| Relationship | Provides the basis for accounting period concept | Depends on going concern — you divide the life of a continuing business |
Exercise Question 9
Q: What is the Accounting Standards Board? What is its role?
The Accounting Standards Board (ASB) is a body set up by the Institute of Chartered Accountants of India (ICAI) in 1977. Its role is to formulate accounting standards for India.
Process of formulating a standard:
1. Identify the area where a standard is needed. 2. Prepare a draft (Exposure Draft) and circulate it for comments from members, industry, regulators, and the public. 3. Consider the feedback received and finalise the standard. 4. Issue the standard under the authority of the ICAI Council.
Role of ASB:
- Ensures uniformity in preparation and presentation of financial statements.
- Makes financial statements comparable across firms and periods.
- Aligns Indian standards with international standards (IFRS convergence).
- Updates existing standards in response to changes in law, business environment, or international practice.
Exercise Question 10
Q: Show the effect of the following transactions on the Accounting Equation:
Mohan started business with Rs 2,00,000.
1. Purchased furniture for Rs 20,000 2. Purchased goods for cash Rs 60,000 3. Sold goods costing Rs 40,000 for Rs 55,000 cash 4. Paid salary Rs 8,000 5. Purchased goods on credit from Ramesh Rs 25,000 6. Withdrew cash for personal use Rs 5,000
Equation: 2,00,000 = 0 + 2,00,000
| Opening: Cash = 2,00,000 | Liabilities = 0 | Capital = 2,00,000 |
|---|
After Transaction 1 (Purchased furniture Rs 20,000):
Equation: 1,80,000 + 20,000 = 0 + 2,00,000 → 2,00,000 = 2,00,000 (Balanced)
| Cash = 2,00,000 - 20,000 = 1,80,000 | Furniture = 20,000 | Capital = 2,00,000 |
|---|
After Transaction 2 (Purchased goods for cash Rs 60,000):
Equation: 1,20,000 + 20,000 + 60,000 = 0 + 2,00,000 → 2,00,000 = 2,00,000 (Balanced)
| Cash = 1,80,000 - 60,000 = 1,20,000 | Furniture = 20,000 | Stock = 60,000 | Capital = 2,00,000 |
|---|
After Transaction 3 (Sold goods costing Rs 40,000 for Rs 55,000 cash):
Equation: 1,75,000 + 20,000 + 20,000 = 0 + 2,15,000 → 2,15,000 = 2,15,000 (Balanced)
| Cash = 1,20,000 + 55,000 = 1,75,000 | Furniture = 20,000 | Stock = 60,000 - 40,000 = 20,000 | Capital = 2,00,000 + Profit 15,000 = 2,15,000 |
|---|
After Transaction 4 (Paid salary Rs 8,000):
Equation: 1,67,000 + 20,000 + 20,000 = 0 + 2,07,000 → 2,07,000 = 2,07,000 (Balanced)
| Cash = 1,75,000 - 8,000 = 1,67,000 | Furniture = 20,000 | Stock = 20,000 | Capital = 2,15,000 - 8,000 = 2,07,000 |
|---|
After Transaction 5 (Purchased goods on credit from Ramesh Rs 25,000):
Equation: 1,67,000 + 20,000 + 45,000 = 25,000 + 2,07,000 → 2,32,000 = 2,32,000 (Balanced)
| Cash = 1,67,000 | Furniture = 20,000 | Stock = 20,000 + 25,000 = 45,000 | Creditors = 25,000 | Capital = 2,07,000 |
|---|
After Transaction 6 (Withdrew cash for personal use Rs 5,000):
Equation: 1,62,000 + 20,000 + 45,000 = 25,000 + 2,02,000 → 2,27,000 = 2,27,000 (Balanced)
| Cash = 1,67,000 - 5,000 = 1,62,000 | Furniture = 20,000 | Stock = 45,000 | Creditors = 25,000 | Capital = 2,07,000 - 5,000 = 2,02,000 |
|---|
Related Guides:
- [Chapter 2 Guide — Theory Base of Accounting](/school/cbse/class/11/accountancy/cbse-theory-base-of-accounting)
- [All Class 11 Accountancy Solutions](/school/cbse/class/11/accountancy/solutions)
- [Class 11 Accountancy Subject Guide](/school/cbse/class/11/accountancy)