1. i) The concept of conservatism takes all prospective profits and leaves all prospective losses.

o Correct answer: © Conservatism Concept

2. (ii) According to the going concern concept, a business is viewed as having:
o Correct answer: (b) an indefinite life.
3. (iii) According to which of the following concepts, even the proprietor of a business is taken as a creditor to the
extent of his capital?
o Correct answer: (d) Business Entity Concept
4. (iv) According to which of the following concepts, in determining net profit for the period, costs incurred to earn the
revenue is charged against that revenue?
o Correct answer: © Matching Concept
5. (v) Valuing stock at lower cost or net realizable value underlies an example of:
o Correct answer: (b) Prudence Alternative
6. (vi) During the lifetime of an entity, accounting produces financial statements in accordance with which accounting
concept?
o Correct answer: © accounting period

(d) at least two accounts by equal amount on both the sides.

© 50,000 shall be recognized as revenue in the first subsequent year, and the remaining 50,000 shall be
recognized in the second subsequent year.

(b) Industry Practice because agricultural businesses commonly value their produce based on market value due to
the difficulty in measuring the cost accurately.

1. The calibre or quality of the management team is not shown in the Balance Sheet:
o Concept: The quality of management is not a quantifiable item that can be directly measured
and reported on the balance sheet. It falls under the qualitative characteristics of financial
reporting.
o Explanation: The balance sheet primarily includes quantifiable items such as assets, liabilities,
and equity. Non-quantifiable factors like management quality are not reflected directly but may
indirectly impact financial performance.
2. Advance received from a customer is not taken as income or sale:
o Concept: This situation relates to the revenue recognition principle.
o Explanation: Revenue is recognized when it is earned, which typically occurs when goods or
services are delivered to the customer. An advance payment is considered a liability until the
related goods or services are provided.
3. Assets are recorded in books at the cost incurred for acquisition of such assets:
o Concept: This situation is based on the historical cost principle.
o Explanation: According to this principle, assets are initially recorded at the cost incurred to
acquire them (e.g., purchase price, installation costs, etc.). Subsequent changes in market value
are not reflected unless specific circumstances warrant revaluation.
4. Revenue is recognized when it is earned and expenses are recognized when incurred:
o Concept: This situation aligns with the revenue recognition principle and the matching
principle.
o Explanation:
 Revenue Recognition Principle: Revenue is recognized when it is earned, typically upon
delivery of goods or completion of services.
 Matching Principle: Expenses are recognized in the same period as the related revenue. This
ensures that expenses are matched against the revenue they helped generate.
5. A business for which financial statements are prepared is separate and distinct from the
owner of the entity:
o Concept: This situation reflects the business entity concept (also known as the economic entity
assumption).
o Explanation: The business entity concept assumes that the business is separate from its owners.
Financial statements are prepared for the business as an independent entity, regardless of the
owner’s personal finances.
6. The assumption is made that the entity will remain in business for a foreseeable period of
time and there is no intention to close down or scale down its operations significantly:
o Concept: This situation is related to the going concern assumption.
o Explanation: The going concern assumption assumes that the business will continue its
operations indefinitely. Financial statements are prepared under the assumption that the business
will not liquidate or cease operations in the near future.
7. Life of the enterprise is broken into smaller parts, and financial statements are prepared
for each period:
o Concept: This situation corresponds to the periodicity assumption.
o Explanation: The periodicity assumption divides the life of the enterprise into specific time
intervals (e.g., monthly, quarterly, or annually). Financial statements are prepared for each period
to provide timely and relevant information to users.

1. Business Entity Concept:

o True. The Business Entity Concept states that the business is separate from its owners or other entities. It applies to
all types of business organizations, including sole proprietorships and partnerships.
2. Money Measurement Concept:
o True. The Money Measurement Concept assumes that only transactions that can be expressed in monetary terms are
recorded in the accounting system. It does not consider changes in the value of the monetary unit itself.
3. Consistency Principle:
o True. The principle of consistency requires that once an accounting method or treatment is chosen, it should be
consistently applied over time. This is especially important when alternative methods are equally acceptable.
4. Conservatism Concept:
o True. The Conservatism Concept suggests that accountants should anticipate no profit or gain but provide for all
possible losses. It encourages a cautious approach in recognizing gains and assets but promptly recognizing losses.
5. Realization Concept:
o False. According to the Realization Concept (also known as the Revenue Recognition Principle), revenue should be
recognized when it is earned, not necessarily when it is received. It focuses on the substance of the transaction rather
than the timing of cash flows.
6. Accounting Principles:
o True. Accounting principles are indeed rules of action or conduct adopted by accountants universally. They guide
the recording, presentation, and interpretation of financial transactions.
7. Going Concern Concept:
o True. The Going Concern Concept assumes that a business will continue to operate indefinitely unless there is
evidence to the contrary. Assets are valued based on their expected future use, not just market price.
8. Concept of Disclosure:
o True. The Concept of Disclosure requires that all material information relevant to financial statements should be
disclosed. Transparency is essential for users of financial information.
9. Dual Aspect Concept:
o True. According to the Dual Aspect Concept (also known as the Double Entry System), every business transaction
affects at least two accounts, with equal debits and credits. This ensures that the accounting equation (Assets =
Liabilities + Equity) remains in balance.
 The Accounting Equation states:

Assets=Liabilities+Owner’s Equity (Capital)Assets=Liabilities+Owner’s Equity (Capital)

Now, let’s break down each transaction:

1. Commenced business with cash 50,000:
o Assets increase by 50,000 (cash).
o No change in liabilities or capital.
2. Purchased goods for cash 20,000 and credit 30,000:
o Assets increase by 20,000 (cash) and 30,000 (accounts payable).
o No change in capital.
3. Sold goods for cash 40,000, costing 30,000:
o Assets decrease by 30,000 (cost of goods sold) and increase by 40,000 (cash).
o No change in liabilities or capital.
4. Rent paid 500, Salaries 5,000:
o Assets decrease by 500 (rent expense) and 5,000 (salary expense).
o No change in liabilities or capital.
5. Rent outstanding 100, Salaries Outstanding 1,000:
o Liabilities increase by 100 (rent payable) and 1,000 (salaries payable).
o No change in assets or capital.
6. Bought furniture for 5,000 on credit:
o Assets increase by 5,000 (furniture) and liabilities increase by 5,000 (accounts payable).
o No change in capital.
7. Bought refrigerator for personal use 5,000, paid cash:
o This transaction is not related to business operations and should not be included in the accounting equation.
8. Purchased computer for cash 20,000:
o Assets decrease by 20,000 (cash).
o No change in liabilities or capital.
9. Cash withdrawn for personal use 10,000:
o This transaction is also not related to business operations and should not be included in the accounting equation.

Now let’s summarize the effects:

 Assets:
o Cash: 50,000 + 20,000 - 30,000 - 500 - 5,000 = 34,500
o Furniture: 5,000
o Total Assets: 39,500
 Liabilities:
o Accounts Payable: 30,000 + 5,000 = 35,000
o Rent Payable: 100
o Salaries Payable: 1,000
o Total Liabilities: 36,100
 Owner’s Equity (Capital):
o Owner’s Equity = Assets - Liabilities
o Owner’s Equity = 39,500 - 36,100 = 3,400

Anil’s Balance Sheet:

Assets Liabilities

Cash: 34,500 Accounts Payable: 35,000

 Furniture: 5,000 Rent Payable: 100

Total Assets: 39,500 Salaries Payable: 1,000

Total Liabilities: 36,100

Owner’s Equity (Capital)

Owner’s Equity: 3,400

Total Liabilities + Owner’s Equity Total Liabilities + Owner’s Equity

39,500 39,500

1. Irrecoverable Debt from Ramesh:

o The amount due from Ramesh, which is ₹5,000, is considered irrecoverable.
o To record this, we’ll make the following journal entry:
o Bad Debts A/c Dr. 5,000
o To Ramesh A/c 5,000

Explanation:

 We debit the “Bad Debts” account to recognize the loss.

 We credit Ramesh’s account to adjust the outstanding amount.
2. Sohan’s Insolvency:
o Sohan has been declared insolvent, and we received 60% of the outstanding amount of ₹10,000.
o To record this, we’ll make the following journal entry:
o Cash/Bank A/c Dr. 6,000
o To Sohan A/c 6,000

Explanation:

 We debit the “Cash/Bank” account to recognize the amount received.

 We credit Sohan’s account to adjust the outstanding amount.
3. Recovery of Bad Debt Written Off Last Year:
o We received cash for a bad debt that was written off last year, amounting to ₹700.
o To record this, we’ll make the following journal entry:
o Cash/Bank A/c Dr. 700
o To Bad Debts A/c 700

Explanation:

 We debit the “Cash/Bank” account to recognize the amount received.

 We credit the “Bad Debts” account to reverse the write-off made earlier.
4. Final Dividend from Hari (Insolvent Debtor):
o Hari, our debtor for ₹10,000, became insolvent. We received a final dividend of 60 paise in a rupee from his
receiver.
o The payment was partly in the form of a machine valued at ₹3,500 and the balance in cash.
o To record this, we’ll make the following journal entry:
o Cash/Bank A/c Dr. 6,000
o Machine A/c Dr. 3,500
o To Hari A/c 9,000

Explanation:

 We debit the “Cash/Bank” account for the cash received.

 We also debit the “Machine” account for the value of the machine received.
 We credit Hari’s account to adjust the outstanding amount.

1. April 1: Paid into the bank for opening a current account.

o Journal Entry:
 Debit: Bank (Current Account)

→→

Amount paid

 Credit: Cash

→→

Amount paid

2. April 3: Withdrawn from the bank.

o Journal Entry:
 Debit: Cash

→→

Amount withdrawn

 Credit: Bank (Current Account)

→→

Amount withdrawn

3. April 4: Withdrawn from the bank for personal use.

o Journal Entry:
 Debit: Personal Drawings
 →→

Amount withdrawn

 Credit: Bank (Current Account)

→→

Amount withdrawn

4. April 5: Placed on fixed deposit account at the bank by transferring from the current account.
o Journal Entry:
 Debit: Fixed Deposit Account

→→

Amount transferred

 Credit: Bank (Current Account)

→→

Amount transferred

5. April 7: Salaries paid.

o Journal Entry:
 Debit: Salaries Expense

→→

Total salaries paid

 Credit: Bank (Current Account)

→→

Total salaries paid

6. April 10: Received a cheque from Raj & Co. to whom goods were sold for ₹20,000 last year; allowed him a 1%
discount.
o Journal Entry:
 Debit: Raj & Co. (Accounts Receivable)

→→

Amount due

 Credit: Sales

→→
 Amount of goods sold

 Credit: Discount Allowed

→→

Discount given to Raj & Co.

7. April 12: Raj & Co.'s cheque deposited into the bank.
o Journal Entry:
 Debit: Bank (Current Account)

→→

Amount deposited

 Credit: Raj & Co. (Accounts Receivable)

→→

Amount received

8. April 30: Interest charged by the bank.

o Journal Entry:
 Debit: Bank Charges (Interest Expense)

→→

Interest charged

 Credit: Bank (Current Account)

→→

Interest charged

9. April 30: Paid rent by cheque.

o Journal Entry:
 Debit: Rent Expense

→→

Rent paid

 Credit: Bank (Current Account)

→→

Rent paid
the journal entries for each transaction:

(i) Goods purchased for 5,000 were used by the proprietor for personal purposes.

Proprietor's Drawings A/C 5,000

To Purchases A/C 5,000

(ii) Goods stolen in transit (Sales Price 8,000, Cost 6,000).

Loss by Theft A/C 6,000

To Purchases A/C 6,000

(iii) Goods uninsured of ₹ 3,000 (purchase cost) were destroyed by fire.

Loss by Fire A/C 3,000

To Purchases A/C 3,000

(iv) Goods costing * 1,000 damaged by fire and Insurance Company accepted claim of * 800 and cheque is received
from the Insurance Company.

Bank A/C 800

To Insurance Claim A/C 800

(v) Goods costing 500 given as charity (Sales Price 600).

Charity A/C 500

To Purchases A/C 500

(vi) 1,500 paid to landlord for rent.

Rent A/C 1,500

To Bank A/C 1,500