Accounting Principles and Concepts Questions and Answers

Q: The double entry accounting system is :- (Choose the most appropriate option from below)

The double entry system is the one in which business transactions are recorded from dual aspects.Every transaction affects at least two accounts: one is debited and another is credited with the same amount. Recording both aspects is why total debits always equal total credits, which lets a trial balance check the books.Recording transactions from a single aspect is the single entry system, an incomplete method often kept by small traders. That is also why 'useful for small business' is not its defining feature. 'Involving all the interested parties' describes the users of accounting information, not a system of recording.

Q: As per which accounting convention 'contingent liability' is shown by way of a footnote below the Balance Sheet ?

Contingent liabilities are shown as a footnote under the convention of full disclosure.The full disclosure convention requires the financial statements to reveal all information material to users' decisions. A contingent liability, such as a guarantee given for another party or a disputed claim pending in court, is not yet an actual liability and so is not entered in the balance sheet totals, but it could become one. It is therefore disclosed by way of a note.Conservatism is about providing for losses but not anticipating gains. Materiality lets insignificant items be treated simply, and consistency requires the same methods year after year. None of them is the reason for the footnote.

Q: Human Resource Accounting is an expected solution over the limitations of ........................ .

Human Resource Accounting addresses the limitation of the money measurement concept.Under the money measurement concept, only items that can be measured in money are recorded. The skills, experience and loyalty of employees, often a firm's most valuable resource, therefore never appear in the balance sheet. Human Resource Accounting tries to measure and report the value of people (through cost or value-based models), which is a direct response to that limitation.It does not deal with the realisation concept or the classification of assets, liabilities, income and expenses as such.

Q: Omission of paise and showing the round figures in financial statements is based on ...............

Rounding off figures rests on the Materiality concept.Materiality says that accounts should disclose items that would affect the decisions of users, and may ignore or simplify amounts too small to matter. Paise are immaterial in the accounts of a business of any size, so figures can be shown in round rupees, thousands or lakhs.Conservatism concerns providing for losses but not anticipating gains, consistency means using the same methods from year to year, and realisation concerns when revenue is recognised; none of them justifies rounding.

Q: Which of the following is a result of separate entity concept ?

The separate entity concept results in owners capital and drawings.Under the business entity concept the business is treated as distinct from its owner. That is why the money the owner brings in is recorded as capital, a liability of the business to the owner, and what the owner takes out for personal use is recorded as drawings.Research and development, buying and selling, and sale of scrap are ordinary business transactions that would be recorded under any concept; they are not consequences of separating the owner from the business.

Q: Inflation Accounting is an expected solution over the limitations of ..................... assumption.

Inflation accounting answers the limitations of the Historical cost concept.Conventional accounts record assets at the price paid for them. When prices rise steadily, these historical figures understate the current value of assets, depreciation is charged on old costs, and profit is overstated, so a firm may pay out dividends and taxes from what is really capital. Inflation accounting (current purchasing power or current cost accounting) restates the figures to reflect changes in the price level and so removes this distortion.The matching concept pairs revenue with the expenses of the same period, the dual aspect concept underlies double entry, and consistency requires the same methods year after year. None of them is the assumption that inflation undermines.

Q: As per which accounting convention depreciation is provided for in the annual financial statements ?

The key ties depreciation to the convention of going concern.Because the business is assumed to continue indefinitely, fixed assets are not shown at what they would fetch if sold today. They are recorded at cost and that cost is spread over their useful life, year by year, as depreciation in the annual statements. If the firm were about to close, assets would be shown at realisable value and depreciation in this sense would not arise.Conservatism concerns providing for losses but not anticipating gains, materiality concerns which items are significant enough to disclose, and consistency requires the chosen depreciation method to be used from year to year; none of them is the reason depreciation is charged.

Which of the following statement is incorrect in relation to Branch accounting

A.A branch is a separate legal entity
B.All branches are controlled by their head office
C.An organisation can open a branch in the same country where it is registered or in any other country
D.Branches are opened by both profit making organisations (viz. departmental stores, hotels etc.) and nonprofit making organisations (viz. charitable institutions) as well.

Exam Year(s)

DSSSB - 2023,

Answer: A

The incorrect statement is 'A branch is a separate legal entity'. A branch is only a part of the same business as its head office: it has no legal existence of its own, so the head office is legally responsible for its contracts and debts, and the accounts of the branch are ultimately merged into those of the head office. The other statements are correct. Branches are controlled by the head office, an organisation can open a branch in its home country or abroad, and branches are opened by profit-making concerns such as departmental stores and hotels as well as by non-profit bodies such as charitable institutions.

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Which of the following are the methods of measuring business income
(i) Net worth method
(ii) Matching Principle
(iii) Reconciliation method

A.Only (i) and (ii)
B.Only (ii) and (iii)
C.Only (i) and (iii)
D.All (i), (ii) and (iii)

Exam Year(s)

DSSSB - 2023,

Answer: A

The keyed answer is only (i) and (ii). Business income is measured by comparing the net worth (capital) of the business at the start and end of a period, with adjustment for drawings and capital introduced, which is the net worth method, and by the matching principle, which sets the expenses of the period against the revenues they helped to earn. The reconciliation method is not a recognised way of measuring business income, so (iii) is left out. This follows the answer key and the usual accounting-theory treatment of the two methods.

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Which of the following are the objectives of financial accounting? i) Proper recording of transactions ii) Ascertainment of the financial position iii) Reporting financial information iv) Defalcation prevention v) Digital marketing

A.i, ii, iii and iv only
B.ii and iii only
C.i, iii and iv only
D.i and ii only

Exam Year(s)

DSSSB TGT - 2023,

Answer: A

The objectives of financial accounting are proper recording of transactions, ascertainment of the financial position, reporting of financial information, and prevention of defalcation (fraud). Digital marketing is a promotion activity and is not an objective of accounting, so any option containing v is wrong. The options with fewer objectives leave some out, and the first option lists all four. Prevention of defalcation means preventing the misuse of an organisation's funds, which is why the books must be kept accurately.

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The double entry accounting system is :- (Choose the most appropriate option from below)

A.that is useful for small business
B.Involving all the interested parties of accounting information.
C.In which transactions are recorded from a single aspect.
D.In which business transactions are recorded from dual aspects.

Exam Year(s)

RSMSSB - 2025, NHM Rajasthan Pharmacist - 2025, Rajasthan NHM Pharma Assistant - 2025,

Answer: D

The double entry system is the one in which business transactions are recorded from dual aspects.

Every transaction affects at least two accounts: one is debited and another is credited with the same amount. Recording both aspects is why total debits always equal total credits, which lets a trial balance check the books.

Recording transactions from a single aspect is the single entry system, an incomplete method often kept by small traders. That is also why 'useful for small business' is not its defining feature. 'Involving all the interested parties' describes the users of accounting information, not a system of recording.

Discuss in Forum

As per which accounting convention 'contingent liability' is shown by way of a footnote below the Balance Sheet ?

A.Convention of conservatism
B.Convention of full disclosure
C.Convention of materiality
D.Convention of consistency

Exam Year(s)

MH SET - 2018, SET Exam - 2018,

Answer: B

Contingent liabilities are shown as a footnote under the convention of full disclosure.

The full disclosure convention requires the financial statements to reveal all information material to users' decisions. A contingent liability, such as a guarantee given for another party or a disputed claim pending in court, is not yet an actual liability and so is not entered in the balance sheet totals, but it could become one. It is therefore disclosed by way of a note.

Conservatism is about providing for losses but not anticipating gains. Materiality lets insignificant items be treated simply, and consistency requires the same methods year after year. None of them is the reason for the footnote.

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Human Resource Accounting is an expected solution over the limitations of ........................ .

A.Assets and liability
B.Income and expenses
C.Realisation concept
D.Money measurement concept

Exam Year(s)

MH SET - 2019, SET Exam - 2019,

Answer: D

Human Resource Accounting addresses the limitation of the money measurement concept.

Under the money measurement concept, only items that can be measured in money are recorded. The skills, experience and loyalty of employees, often a firm's most valuable resource, therefore never appear in the balance sheet. Human Resource Accounting tries to measure and report the value of people (through cost or value-based models), which is a direct response to that limitation.

It does not deal with the realisation concept or the classification of assets, liabilities, income and expenses as such.

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Omission of paise and showing the round figures in financial statements is based on ...............

A.Conservatism concept
B.Consistency concept
C.Materiality concept
D.Realization concept

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: C

Rounding off figures rests on the Materiality concept.

Materiality says that accounts should disclose items that would affect the decisions of users, and may ignore or simplify amounts too small to matter. Paise are immaterial in the accounts of a business of any size, so figures can be shown in round rupees, thousands or lakhs.

Conservatism concerns providing for losses but not anticipating gains, consistency means using the same methods from year to year, and realisation concerns when revenue is recognised; none of them justifies rounding.

Discuss in Forum

Which of the following is a result of separate entity concept ?

A.Research and development
B.Buying and selling
C.Owners capital and drawings
D.Sale of scrap

Exam Year(s)

MH SET - 2020, SET Exam - 2020,

Answer: C

The separate entity concept results in owners capital and drawings.

Under the business entity concept the business is treated as distinct from its owner. That is why the money the owner brings in is recorded as capital, a liability of the business to the owner, and what the owner takes out for personal use is recorded as drawings.

Research and development, buying and selling, and sale of scrap are ordinary business transactions that would be recorded under any concept; they are not consequences of separating the owner from the business.

Discuss in Forum

Inflation Accounting is an expected solution over the limitations of ..................... assumption.

A.Historical cost concept
B.Matching concept
C.Dual aspect concept
D.Convention of consistency

Exam Year(s)

MH SET - 2021, SET Exam - 2021,

Answer: A

Inflation accounting answers the limitations of the Historical cost concept.

Conventional accounts record assets at the price paid for them. When prices rise steadily, these historical figures understate the current value of assets, depreciation is charged on old costs, and profit is overstated, so a firm may pay out dividends and taxes from what is really capital. Inflation accounting (current purchasing power or current cost accounting) restates the figures to reflect changes in the price level and so removes this distortion.

The matching concept pairs revenue with the expenses of the same period, the dual aspect concept underlies double entry, and consistency requires the same methods year after year. None of them is the assumption that inflation undermines.

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10.

As per which accounting convention depreciation is provided for in the annual financial statements ?

A.Convention of conservatism
B.Convention of going concern
C.Convention of materiality
D.Convention of consistency

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: B

The key ties depreciation to the convention of going concern.

Because the business is assumed to continue indefinitely, fixed assets are not shown at what they would fetch if sold today. They are recorded at cost and that cost is spread over their useful life, year by year, as depreciation in the annual statements. If the firm were about to close, assets would be shown at realisable value and depreciation in this sense would not arise.

Conservatism concerns providing for losses but not anticipating gains, materiality concerns which items are significant enough to disclose, and consistency requires the chosen depreciation method to be used from year to year; none of them is the reason depreciation is charged.

Discuss in Forum

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