Question 1 (c)
Identify the accounting principle
6 marks
- Time to write
- About 12 minutes
- Notes
- Crux notes
Question
Question 1 (c) · 6 marksState the accounting principle involved in the following statements.
The drawings account is debited when the proprietor withdraws cash from the bank for his personal expenses.
In the absence of evidence to the contrary, it is assumed that the business will not be liquidated in the near future.
An advance received from a customer is not recorded as sales.
The life of a business is divided into several parts, which are called accounting years or financial years.
A pair of scissors bought for ₹80 is included in profit and Loss A/c.
₹2 lakh Capital contributed by the owner results in an increase in cash of ₹2 lakh.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- (i)–(vi)6 items, each marked on its own: give each its share.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 (i) Business Entity 1 mark 2 min
- 2 (ii) Going Concern 1 mark 2 min
- 3 (iii) Revenue Recognition Realisation 1 mark 2 min
- 4 (iv) Accounting Period 1 mark 2 min
- 5 (v) Materiality 1 mark 1 min
- 6 (vi) Dual Aspect 1 mark 1 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
| # | Statement (in brief) | Principle | Why |
|---|---|---|---|
| (i) | Drawings debited for cash the proprietor takes for personal expenses | Business Entity | The business is a unit separate from its owner, and the proprietor's private affairs are not mixed up with those of the business. Cash taken for personal use reduces the owner's capital; it is not a business expense. |
| (ii) | Business assumed not to be liquidated in the near future | Going Concern | A concern that intends to keep using its assets values them at cost; forced-sale value matters only if the business is winding up. |
| (iii) | An advance from a customer is not recorded as sales | Revenue Recognition (Realisation) | Revenue belongs to the year in which it is earned, whether or not cash has been received. An advance is received before anything is earned, so it is a liability until the goods are supplied. |
| (iv) | The life of a business is split into accounting years | Accounting Period (Periodicity) | Profit is found by matching a particular period's revenues with the costs of earning them, which needs the continuous life of a business to be cut into artificial accounting years. |
| (v) | A ₹80 pair of scissors charged to Profit & Loss | Materiality | An item too small to matter is charged as an expense in the year it is bought, even if it lasts longer; the DU text's example is a bottle of ink. |
| (vi) | ₹2 lakh capital raises cash by ₹2 lakh | Dual Aspect | Every transaction has two equal effects, so assets = capital + liabilities always holds: cash (an asset) and capital both rise by ₹2 lakh. |
Where the 6 marks sit
| # | Statement → principle | Marks |
|---|---|---|
| 1 | (i) Business Entity | 1 |
| 2 | (ii) Going Concern | 1 |
| 3 | (iii) Revenue Recognition (Realisation) | 1 |
| 4 | (iv) Accounting Period | 1 |
| 5 | (v) Materiality | 1 |
| 6 | (vi) Dual Aspect | 1 |
| Total | 6 |
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