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Chapter Analysis
Intermediate17 pages • EnglishQuick Summary
The chapter outlines the Theory Base of Accounting, explaining fundamental concepts such as the Business Entity, Money Measurement, and Going Concern among others. It emphasizes the importance of Generally Accepted Accounting Principles (GAAP) in ensuring uniformity and consistency in financial statements. The chapter also discusses the necessity of accounting standards and introduces the dual systems of accounting: cash and accrual basis. Furthermore, it highlights various accounting concepts and principles critical for accurate financial representation.
Key Topics
- •Business Entity Concept
- •Money Measurement Concept
- •Going Concern Concept
- •Accounting Period
- •Dual Aspect Concept
- •Revenue Recognition
- •Matching Concept
- •Accounting Standards
Learning Objectives
- ✓Identify the need for a theoretical base in accounting.
- ✓Explain the nature of Generally Accepted Accounting Principles (GAAP).
- ✓State the meaning and purpose of basic accounting concepts.
- ✓List the accounting standards issued by the Institute of Chartered Accountants of India.
- ✓Describe the systems of accounting.
- ✓Describe the basis of accounting.
Questions in Chapter
Why is it necessary for accountants to assume that business entity will remain a going concern?
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When should revenue be recognised? Are there exceptions to the general rule?
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What is the basic accounting equation?
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The realisation concept determines when goods sent on credit to customers are to be included in the sales figure for the purpose of computing the profit or loss for the accounting period. Which of the following tends to be used in practice to determine when to include a transaction in the sales figure for the period. When the goods have been: a. dispatched b. invoiced c. delivered d. paid for Give reasons for your answer.
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Complete the following worksheet: (i) If a firm believes that some of its debtors may ‘default’, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the _________ concept. (ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the ___________ concept. (iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the ___________ concept. (iv) The ___________ concept states that if straight line method of depreciation is used in one year, then it should also be used in the next year. (v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be increased. Normal accounting procedure is to ignore this because of the ___________. (vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the ___________.
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Additional Practice Questions
Explain the Business Entity concept and its importance in accounting.
mediumAnswer: The Business Entity concept states that the business is considered a separate legal entity from its owner(s). This is important because it allows for clear financial reporting and accountability, ensuring that the personal financial matters of the owner(s) do not interfere with the business’s accounts.
Describe the Dual Aspect concept with an example.
mediumAnswer: The Dual Aspect concept is fundamental to double-entry bookkeeping, which states that every transaction has two sides: a debit and a credit. For example, when a company buys goods worth $1000 on credit, its inventory increases by $1000 (debit), and its accounts payable also increase by $1000 (credit).
What are Generally Accepted Accounting Principles (GAAP) and why are they important?
mediumAnswer: GAAP are a set of rules and guidelines that ensure financial statements are consistent, comparable, and reliable. They are important because they help maintain transparency and trust in the financial reporting process and make it easier for investors to compare financial information across different companies.
How does the Matching Concept ensure accurate financial reporting?
hardAnswer: The Matching Concept ensures that expenses and revenues are recorded in the same accounting period they are incurred or earned. This ensures that the financial statements accurately reflect the performance of a business by matching expenses with the income they generate.
Briefly explain the role of Accounting Standards.
easyAnswer: Accounting Standards are frameworks and guidelines used to ensure that companies provide uniform and comparable financial statements. They standardize accounting practices and improve the accuracy, transparency, and comparability of financial reports.