NCERT Solutions for Class 11 Accountancy Financial Accounting part 2

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NCERT Solutions for Class 11 Accountancy

Financial Accounting part 2

Q1: The role of accounting has changed over the period of time"- Do you agree?

Answer: The role of accounting is ever-changing. While in earlier times, accounting was merely concerned with recording financial events, i.e. record-keeping activity; however, nowadays, accounting is done with the rationale of not only maintaining records, but also providing an information system that provides important and relevant information to various accounting users. The need of this change is brought over due to the ever-changing and dynamic business environment, which is more competitive in nature now than it was in earlier times. Further, there are various relevant activities like decision making, forecasting, comparison, and evaluation that make these changes in the role of accounting, inevitable.

Q2: Giving examples, explain each of the following accounting terms:

• Fixed assets
• Gain
• Profit
• Revenue
• Expenses
• Short-term liability
• Capital

Answer:

• Fixed assets- These are held for long term and increase the profit earning capacity of the business, over various accounting periods.
• These assets are not meant for sale; for example, land, building, machinery, etc.
• Revenue- It refers to the amount received from day-to-day activities of business, viz. amount received from sales of goods and services to customers; rent received, commission received, dividend, royalty, interest received, etc. are items of revenue that are added to the capital.
• Capital- It refers to the amount invested by the owner of a firm. It may be in form of cash or asset. It is an obligation of the business towards the owner of the firm, since business is treated separate or distinct from the owner.
• Capital = Assets - Liabilities.
• Gains- Gains are incidental to the business. They arise from irregular activities or non-recurring transactions; for example, profit on sale of fixed assets, appreciation in value of asset, profit on sale of investment, etc.
• Expenses- Expenses are those costs that are incurred to maintain the profitability of business, likerent, wages, depreciation, interest, salaries, etc. These help in the production, business operations and generating revenues.
• Profit- This refers to the excess of revenue over the expense. It is normally categorised into gross profit or net profit. Net profit is added to the capital of the owner, which increases the owner's capital. For example, goods sold above its cost.
• Short term liabilities- Those liabilities that are incurred with an intention to be paid or are payable within a year; for example, bank overdraft creditors, bills payable, outstanding wages, short-term loans, etc.

Q3: What is the primary reason for the business students and others to familiarise themselves with the accounting discipline?

Answer: Every monetary transaction must be recorded in such a manner that various accounting users must understand and interpret these results in the same manner without any ambiguity. The reasons for why business students and others should familiarise themselves with the accounting discipline are given below.

1. It helps in learning the various aspects of accounting.
2. It helps in learning how to maintain books of accounts.
3. It helps in learning how to summarise accounting information.
4. It helps in learning how to interpret accounting information with relative accuracy.

Q4: Explain the factors, which necessitated systematic accounting.

Answer: The factors that necessitated systematic accounting are given below.

1. Only financial transactions are recorded- Those events that are financial in nature are only recorded in the books of accounts. For example, salary of an employee is recorded in the books but his/her educational qualification is not recorded.
2. Transactions are recorded in monetary terms- Only those transactions which can be expressed in monetary terms are recorded in the books. For example, if a business has two buildings and four machines, then their monetary values is recorded in the books, i.e., two buildings costing Rs 2,00,000, four machines costing Rs 8,00,000. Thus, the total value of assets is Rs 10,00,000.
3. Art of recording- Transactions are recorded in the order of their occurrence.
4. Classification of transaction- Business transactions of similar nature are classified and posted under their respective accounts. For example, all the transactions relating to machinery will be posted in the Machinery Account.
5. Summarising of data- All business transactions are summarised in the form of Trial Balance, Trading Account, Profit and Loss Account and Balance Sheet that provides necessary information to various users.

Q5: Describe the brief history of accounting.

Answer: The history of accounting can be traced long back in civilisation. Around 4000 B.C., in Babylonia and Egypt, payment of wages and taxes were recorded on clay tablets. As history claims that Egyptians kept the record of gold and valuables deposits and withdrawal from the treasuries. These records were reported on daily basis by the incharge of treasuries to the wazir, who used to forward the monthly reports to the king. Babylonia and Egypt used this method to rectify and remove errors, frauds and inefficiency from the records. Around 2000 B.C., China used sophisticated form of accounting. In Greece, accounting was used to maintain total receipts and total payments and to balance government accounts. In Rome, around 700 B.C., receipts and payments were recorded in daybook and were posted in the ledger at the end of the month. In India, around twenty-three centuries ago, Kautilya wrote the book Arthshastra, which describes how accounting records have to be maintained. In 1494, Luca Pacioli wrote the book Summa de Arithmetica Geometria Proportioniet Proportionalita. In this, he explained the term debit and credit, which are used in accounting till date.