case study questions on accounting principles

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Class 11 Accountancy Case Studies Questions

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CBSE introduced case-based questions in class 11 accountancy question papers last year to enhance and develop analytical and reasoning skills among students. Class 11 Accountancy Case Studies Questions are given in CBSE model question papers too. Last year sample case-based questions were released by the CBSE and immediately an air of confusion was created among all. This concept was uncharted territory for both students and teachers.

A hypothetical text was provided on the basis of which the student was required to solve the given case-based question asked by CBSE in the accountancy class 11 exam. Initially, the case-based questions appeared to be tedious for both the students and the teachers as they were unprepared to deal with the new pattern of questions but now a lot more clarity is there that has made the question paper quite student-friendly.

Case Study Questions in class 11 (Accountancy)

Case-based questions in Accountancy are considered to be quite challenging by the class 11 students. The questions need to be well prepared and adequately practiced before attempting the class 11 accountancy exam. The accountancy class 11 syllabus is a well-integrated program that facilitates the students to comprehend and learn the basic accounting theories/principles. The subject is the base of major accounting fundamentals that are studied in depth at an advanced level in class 12. For students appearing for grade 11 exams from the Commerce stream, Accountancy is a prime subject. Accountancy is considered to be the most difficult of all other core subjects in the class 11 commerce stream.

The subject is consuming and the case studies are termed to be troublesome for they do require conceptual clarity. To ace this CBSE exam, students need to put in the extra effort. Among all the core subjects of the Commerce stream i.e accountancy, economics and business studies, it’s accountancy that renders a tough time for the students because of its complex theories and principles. It is an arduous task to score well in the 11-grade accountancy examination without adequate practice and knowledge. Many students who opt for the commerce stream after their 10-grade exams target chartered accountancy as a career option, so the subject is of paramount importance for them.

Accountancy syllabus of class 11 CBSE

The entire Accountancy course is divided into 2 parts:

• Part A, Financial Accounting _ I
• Part B, Financial Accounting _ II

Most of the case study questions are centered around the exercises of NCERT textbooks. It is recommended to read the textbooks religiously. There are 2 prescribed textbooks for class 11 Accountancy that have been published by NCERT. But Accountancy has an extensive curriculum and students need to go through other reference books too. Adhering only to NCERT textbooks will not be adequate to achieve proficiency in this subject.

CBSE Class – 11

Accountancy (Code No. 055) Syllabus

Case Study Passage (Accountancy class 11)

In these questions, the students would go through a paragraph with a hypothetical situation, based on which critical reasoning type questions will have to be answered by them. It is important for the students to inspect the passage carefully before trying to attempt the questions. In the coming examination cycle (2022-23), case-based questions will carry a weightage of around 15 to 20%. These questions can be centered on any chapter from the NCERT textbook for accountancy, class 11. Students need to brace well for the case-based questions prior to appearing for their accountancy examination as these questions require a thorough understanding of the key concepts in their syllabus. CBSE aims to increase the weightage of such questions in the years to come.

Kind of case-based Questions in Accountancy

Accountancy is a subject that deals with trade and commerce. The subject records allocate and outline the transactions of a business. The subject is for sure demanding thus requiring a greater effort from the students in order to strive for a perfect score. It is believed to be demanding but at the same time, it is scoring.

The case-based questions asked in the CBSE accountancy question paper for class 11 are of two types:

• Objective- Such questions are asked in the MCQ format
• Subjective- The questions would be answered briefly only but these questions are the ones that would require detailed analysis and application of some fundamental accountancy theories.

How To Prepare For Case-based Questions in Accountancy Grade 11

Students need to prepare well for the case-based questions before appearing for their class 11 Accountancy exams. Here are some tips which will help the student to solve the case-based questions at ease:

• Go through the provided text carefully
• Analyze the situation provided as part of the question asked
• Focus on following correct formats in your responses, accountancy is one subject where apart from the concepts students need to be careful about the formats.
• Brush up well on the theory portion of accountancy, this is the key to scoring a perfect score.
• Practice rigorously
• Provide to-the-point responses

Students need to solidify their concepts in order to ace the accountancy class 11 exam. Case studies can be easily solved if your key fundamentals are crystal clear. These simple points if kept in mind will definitely help the students to fetch good marks in case study questions in class 11 Accountancy .

Case study question examples in accountancy

Here are some given case study questions for CBSE class 11 Accountancy. If you wish to get more case study questions and other study material, download the myCBSEguide app now. You can also access it through our student dashboard.

Accountancy Case Study 1

Read the hypothetical text given and answer the following questions:

Sachin and Dravid are partners in firm sharing profits and losses in the ratio of 3:2. Their balance sheet is given below:

Balance Sheet as on 31.03.2017

On 01.04.2017, they admit Ashwin as a new partner into partnership on the following terms a) He brings in 40,000 as capital and 18,000 towards goodwill for 1/4th share in future profits b) Depreciate furniture by 10% and buildings are revalued at 45,000

• c) PDD is increased to 3,500
• d) Prepaid insurance * 2,000.

Prepare: i) Revaluation Account

. ii) Partners’ Capital Accounts

iii) New Balance

Accountancy Case Study 2

Ram and Shyam are two friends who both have just attended their first class of accountancy. The friends were intrigued by the different branches of accounting and their widespread application. Ram personally liked the branch of accounting in which fund flow statement and budgetary control is used and that branch helps in planning and controlling of operations. As the concept of accounting was further explored, they began discussing the different users of accounting. Ram said that he finds it interesting that even the employees demand information relating to business. Shyam said he finds more interesting the fact that even competitors want information on the relative strengths and weaknesses of the enterprise and for making comparisons, Shyam further said that even accounting helps owners to compare one year’s costs, expenses, and sales with those of other years. However, they were quite shocked by the fact that the management-worker relations were not taken into consideration in the accounting. Meanwhile, Ram and Shyam had an argument at the end of the discussion. Ram was saying that accounting is an art whereas Shyam was saying that accounting is a science. Their teacher came in and said something to them which made them stop the argument.

Q1. What might their teacher have said to solve their argument?

• Ram, please understand, Shetty is correct in this situation

(b) Shyam, please understand, Ram is correct In this situation.

(c) Both are correct

(d) None is correct

Q2. Shyam talked about which type of users of accounting?

(a) Internal users

(b) External users

(c) Both (a) and (b)

(d) None of these.

Q3. Which limitation of accounting is being talked about by them?

(a) Influenced by personal judgment

(b) Omission of qualitative information.

(c) Incomplete information

(d) Based on historical costs

Q4. Which advantage of accounting is being talked about by Shyam in the last part of the first para?

(a) Provides information regarding profit and loss

(b) Provides completes and systematic record

(c) Enables comparative study

(d) Evidence in legal matters

Q5. Which branch of accounting is liked by Ram?

(a) Financial accounting

(b) Cost accounting

(c) Management accounting

(d) Tax accounting

Accountancy Case Study 3

Read the following case study and answer questions

Sam and Jay started with Cash 10,000 and Machinery 1,00,000. They decided to set up a production line for PPE kits for. the protection from Covid 19 virus. As their demand rose, they decided to buy one more piece of machinery. For the same, they took bank overdraft and purchased the machinery. The quality of the company’s product was extremely high and therefore, it could develop a reputation for itself in the market and business was flourishing. After 1.5 years, their old machinery turned obsolete so they decided to sell the same. They sold it and got some cash proceeds. To further increase the brand presence among the concerned stakeholders, they decided to run advertisements from the cash proceeds of machinery sold. As more and more customers demanded their product, they decided to launch a discount for bulk purchases. The discount was not to be recorded in the books of accounts. This campaign was successful and they earned a lot of profits from the same.

Q1. Which type of discount is being discussed in the last part of the passage?

(a) Trade discount

(b) Cash discount

(d) Can’t be determine

Q2. Which asset is discussed in the line, “The quality of the company’s product was very high and therefore, it could develop a reputation for itself in the market and business was flourishing”?

(a) Tangible

(b) Intangible

(c) Current.

(d) Both (a) and (c)

Q3. Which type of liability is discussed in the passage?

(a) Non-current

(b) Current

(d) Can’t be determined

Q4. What was the capital initially invested?

(b) 1,00,000

(c) 1,10,000

Q5. The passage involves capital receipts (apart from initial capital invested).

Advantages of case study questions in Accountancy

The entire class 11 Accountancy syllabus is divided into 2 textbooks that are prescribed by NCERT. The examiner can ask case study questions from any chapter or concept. Students are expected to prepare themselves thoroughly. They ought to practice class 11 Accountancy case-based questions from the various options available to them, so as to ace the subject.

• Uplift the analytical skills of students
• Provide a well-rounded understanding of the concepts
• Enhance intellectual capabilities in students
• Help students to retain knowledge in their long-term memory
• The questions would help to discard the concept of rote learning
• Case studies encourage practical learning.

“Procrastination is the thief of time”

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3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements

If you want to start your own business, you need to maintain detailed and accurate records of business performance in order for you, your investors, and your lenders, to make informed decisions about the future of your company. Financial statements are created with this purpose in mind. A set of financial statements includes the income statement, statement of owner’s equity, balance sheet, and statement of cash flows. These statements are discussed in detail in Introduction to Financial Statements . This chapter explains the relationship between financial statements and several steps in the accounting process. We go into much more detail in The Adjustment Process and Completing the Accounting Cycle .

Accounting Principles, Assumptions, and Concepts

In Introduction to Financial Statements , you learned that the Financial Accounting Standards Board (FASB) is an independent, nonprofit organization that sets the standards for financial accounting and reporting, including generally accepted accounting principles (GAAP) , for both public- and private-sector businesses in the United States.

As you may also recall, GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements. If US accounting rules are followed, the accounting rules are called US GAAP. International accounting rules are called International Financial Reporting Standards (IFRS) . Publicly traded companies (those that offer their shares for sale on exchanges in the United States) have the reporting of their financial operations regulated by the Securities and Exchange Commission (SEC) .

You also learned that the SEC is an independent federal agency that is charged with protecting the interests of investors, regulating stock markets, and ensuring companies adhere to GAAP requirements. By having proper accounting standards such as US GAAP or IFRS, information presented publicly is considered comparable and reliable. As a result, financial statement users are more informed when making decisions. The SEC not only enforces the accounting rules but also delegates the process of setting standards for US GAAP to the FASB.

Some companies that operate on a global scale may be able to report their financial statements using IFRS. The SEC regulates the financial reporting of companies selling their shares in the United States, whether US GAAP or IFRS are used. The basics of accounting discussed in this chapter are the same under either set of guidelines.

Ethical Considerations

Auditing of publicly traded companies.

When a publicly traded company in the United States issues its financial statements, the financial statements have been audited by a Public Company Accounting Oversight Board (PCAOB) approved auditor. The PCAOB is the organization that sets the auditing standards, after approval by the SEC. It is important to remember that auditing is not the same as accounting. The role of the Auditor is to examine and provide assurance that financial statements are reasonably stated under the rules of appropriate accounting principles. The auditor conducts the audit under a set of standards known as Generally Accepted Auditing Standards. The accounting department of a company and its auditors are employees of two different companies. The auditors of a company are required to be employed by a different company so that there is independence.

The nonprofit Center for Audit Quality explains auditor independence: “Auditors’ independence from company management is essential for a successful audit because it enables them to approach the audit with the necessary professional skepticism.” 1 The center goes on to identify a key practice to protect independence by which an external auditor reports not to a company’s management, which could make it more difficult to maintain independence, but to a company’s audit committee. The audit committee oversees the auditors’ work and monitors disagreements between management and the auditor about financial reporting. Internal auditors of a company are not the auditors that provide an opinion on the financial statements of a company. According to the Center for Audit Quality, “By law, public companies’ annual financial statements are audited each year by independent auditors—accountants who examine the data for conformity with U.S. Generally Accepted Accounting Principles (GAAP).” 2 The opinion from the independent auditors regarding a publicly traded company is filed for public inspection, along with the financial statements of the publicly traded company.

The Conceptual Framework

The FASB uses a conceptual framework , which is a set of concepts that guide financial reporting. These concepts can help ensure information is comparable and reliable to stakeholders. Guidance may be given on how to report transactions, measurement requirements, and application on financial statements, among other things. 3

IFRS Connection

Gaap, ifrs, and the conceptual framework.

The procedural part of accounting—recording transactions right through to creating financial statements—is a universal process. Businesses all around the world carry out this process as part of their normal operations. In carrying out these steps, the timing and rate at which transactions are recorded and subsequently reported in the financial statements are determined by the accepted accounting principles used by the company.

As you learned in Role of Accounting in Society , US-based companies will apply US GAAP as created by the FASB, and most international companies will apply IFRS as created by the International Accounting Standards Board (IASB). As illustrated in this chapter, the starting point for either FASB or IASB in creating accounting standards, or principles, is the conceptual framework. Both FASB and IASB cover the same topics in their frameworks, and the two frameworks are similar. The conceptual framework helps in the standard-setting process by creating the foundation on which those standards should be based. It can also help companies figure out how to record transactions for which there may not currently be an applicable standard. Though there are many similarities between the conceptual framework under US GAAP and IFRS, these similar foundations result in different standards and/or different interpretations.

Once an accounting standard has been written for US GAAP, the FASB often offers clarification on how the standard should be applied. Businesses frequently ask for guidance for their particular industry. When the FASB creates accounting standards and any subsequent clarifications or guidance, it only has to consider the effects of those standards, clarifications, or guidance on US-based companies. This means that FASB has only one major legal system and government to consider. When offering interpretations or other guidance on application of standards, the FASB can utilize knowledge of the US-based legal and taxation systems to help guide their points of clarification and can even create interpretations for specific industries. This means that interpretation and guidance on US GAAP standards can often contain specific details and guidelines in order to help align the accounting process with legal matters and tax laws.

In applying their conceptual framework to create standards, the IASB must consider that their standards are being used in 120 or more different countries, each with its own legal and judicial systems. Therefore, it is much more difficult for the IASB to provide as much detailed guidance once the standard has been written, because what might work in one country from a taxation or legal standpoint might not be appropriate in a different country. This means that IFRS interpretations and guidance have fewer detailed components for specific industries as compared to US GAAP guidance.

The conceptual framework sets the basis for accounting standards set by rule-making bodies that govern how the financial statements are prepared. Here are a few of the principles, assumptions, and concepts that provide guidance in developing GAAP.

Revenue Recognition Principle

The revenue recognition principle directs a company to recognize revenue in the period in which it is earned; revenue is not considered earned until a product or service has been provided. This means the period of time in which you performed the service or gave the customer the product is the period in which revenue is recognized.

There also does not have to be a correlation between when cash is collected and when revenue is recognized. A customer may not pay for the service on the day it was provided. Even though the customer has not yet paid cash, there is a reasonable expectation that the customer will pay in the future. Since the company has provided the service, it would recognize the revenue as earned, even though cash has yet to be collected.

For example, Lynn Sanders owns a small printing company, Printing Plus. She completed a print job for a customer on August 10. The customer did not pay cash for the service at that time and was billed for the service, paying at a later date. When should Lynn recognize the revenue, on August 10 or at the later payment date? Lynn should record revenue as earned on August 10. She provided the service to the customer, and there is a reasonable expectation that the customer will pay at the later date.

Expense Recognition (Matching) Principle

The expense recognition principle (also referred to as the matching principle ) states that we must match expenses with associated revenues in the period in which the revenues were earned. A mismatch in expenses and revenues could be an understated net income in one period with an overstated net income in another period. There would be no reliability in statements if expenses were recorded separately from the revenues generated.

For example, if Lynn earned printing revenue in April, then any associated expenses to the revenue generation (such as paying an employee) should be recorded on the same income statement. The employee worked for Lynn in April, helping her earn revenue in April, so Lynn must match the expense with the revenue by showing both on the April income statement.

Cost Principle

The cost principle , also known as the historical cost principle , states that virtually everything the company owns or controls ( assets ) must be recorded at its value at the date of acquisition. For most assets, this value is easy to determine as it is the price agreed to when buying the asset from the vendor. There are some exceptions to this rule, but always apply the cost principle unless FASB has specifically stated that a different valuation method should be used in a given circumstance.

The primary exceptions to this historical cost treatment, at this time, are financial instruments, such as stocks and bonds, which might be recorded at their fair market value. This is called mark-to-market accounting or fair value accounting and is more advanced than the general basic concepts underlying the introduction to basic accounting concepts; therefore, it is addressed in more advanced accounting courses.

Once an asset is recorded on the books, the value of that asset must remain at its historical cost, even if its value in the market changes. For example, Lynn Sanders purchases a piece of equipment for $40,000. She believes this is a bargain and perceives the value to be more at $60,000 in the current market. Even though Lynn feels the equipment is worth $60,000, she may only record the cost she paid for the equipment of $40,000.

Full Disclosure Principle

The full disclosure principle states that a business must report any business activities that could affect what is reported on the financial statements. These activities could be nonfinancial in nature or be supplemental details not readily available on the main financial statement. Some examples of this include any pending litigation, acquisition information, methods used to calculate certain figures, or stock options. These disclosures are usually recorded in footnotes on the statements, or in addenda to the statements.

Separate Entity Concept

The separate entity concept prescribes that a business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally. This concept is called the separate entity concept because the business is considered an entity separate and apart from its owner(s).

For example, Lynn Sanders purchases two cars; one is used for personal use only, and the other is used for business use only. According to the separate entity concept, Lynn may record the purchase of the car used by the company in the company’s accounting records, but not the car for personal use.

Conservatism

This concept is important when valuing a transaction for which the dollar value cannot be as clearly determined, as when using the cost principle. Conservatism states that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount. This would mean that any uncertain or estimated expenses/losses should be recorded, but uncertain or estimated revenues/gains should not. This understates net income, therefore reducing profit. This gives stakeholders a more reliable view of the company’s financial position and does not overstate income.

Monetary Measurement Concept

In order to record a transaction, we need a system of monetary measurement , or a monetary unit by which to value the transaction. In the United States, this monetary unit is the US dollar. Without a dollar amount, it would be impossible to record information in the financial records. It also would leave stakeholders unable to make financial decisions, because there is no comparability measurement between companies. This concept ignores any change in the purchasing power of the dollar due to inflation.

Going Concern Assumption

The going concern assumption assumes a business will continue to operate in the foreseeable future. A common time frame might be twelve months. However, one should presume the business is doing well enough to continue operations unless there is evidence to the contrary. For example, a business might have certain expenses that are paid off (or reduced) over several time periods. If the business will stay operational in the foreseeable future, the company can continue to recognize these long-term expenses over several time periods. Some red flags that a business may no longer be a going concern are defaults on loans or a sequence of losses.

Time Period Assumption

The time period assumption states that a company can present useful information in shorter time periods, such as years, quarters, or months. The information is broken into time frames to make comparisons and evaluations easier. The information will be timely and current and will give a meaningful picture of how the company is operating.

For example, a school year is broken down into semesters or quarters. After each semester or quarter, your grade point average (GPA) is updated with new information on your performance in classes you completed. This gives you timely grading information with which to make decisions about your schooling.

A potential or existing investor wants timely i nformation by which to measure the performance of the company, and to help decide whether to invest. Because of the time period assumption, we need to be sure to recognize revenues and expenses in the proper period. This might mean allocating costs over more than one accounting or reporting period.

The use of the principles, assumptions, and concepts in relation to the preparation of financial statements is better understood when looking at the full accounting cycle and its relation to the detailed process required to record business activities ( Figure 3.2 ).

Concepts In Practice

Tax cuts and jobs act.

In 2017, the US government enacted the Tax Cuts and Jobs Act. As a result, financial stakeholders needed to resolve several issues surrounding the standards from GAAP principles and the FASB. The issues were as follows: “Current Generally Accepted Accounting Principles (GAAP) requires that deferred tax liabilities and assets be adjusted for the effect of a change in tax laws or rates,” and “implementation issues related to the Tax Cuts and Jobs Act and income tax reporting.” 4

In response, the FASB issued updated guidance on both issues. You can explore these revised guidelines at the FASB website (https://www.fasb.org/taxcutsjobsact#section_1).

The Accounting Equation

Introduction to Financial Statements briefly discussed the accounting equation, which is important to the study of accounting because it shows what the organization owns and the sources of (or claims against) those resources. The accounting equation is expressed as follows:

Recall that the accounting equation can be thought of from a “sources and claims” perspective; that is, the assets (items owned by the organization) were obtained by incurring liabilities or were provided by owners. Stated differently, everything a company owns must equal everything the company owes to creditors (lenders) and owners (individuals for sole proprietors or stockholders for companies or corporations).

In our example in Why It Matters , we used an individual owner, Mark Summers, for the Supreme Cleaners discussion to simplify our example. Individual owners are sole proprietors in legal terms. This distinction becomes significant in such areas as legal liability and tax compliance. For sole proprietors, the owner’s interest is labeled “owner’s equity.”

In Introduction to Financial Statements , we addressed the owner’s value in the firm as capital or owner’s equity . This assumed that the business is a sole proprietorship. However, for the rest of the text we switch the structure of the business to a corporation, and instead of owner’s equity, we begin using stockholder’s equity , which includes account titles such as common stock and retained earnings to represent the owners’ interests. The primary reason for this distinction is that the typical company can have several to thousands of owners, and the financial statements for corporations require a greater amount of complexity.

As you also learned in Introduction to Financial Statements , the accounting equation represents the balance sheet and shows the relationship between assets, liabilities, and owners’ equity (for sole proprietorships/individuals) or common stock (for companies).

You may recall from mathematics courses that an equation must always be in balance. Therefore, we must ensure that the two sides of the accounting equation are always equal. We explore the components of the accounting equation in more detail shortly. First, we need to examine several underlying concepts that form the foundation for the accounting equation: the double-entry accounting system, debits and credits, and the “normal” balance for each account that is part of a formal accounting system.

Double-Entry Bookkeeping

The basic components of even the simplest accounting system are accounts and a general ledger . An account is a record showing increases and decreases to assets, liabilities, and equity—the basic components found in the accounting equation. As you know from Introduction to Financial Statements , each of these categories, in turn, includes many individual accounts, all of which a company maintains in its general ledger. A general ledger is a comprehensive listing of all of a company’s accounts with their individual balances.

Accounting is based on what we call a double-entry accounting system , which requires the following:

• Each time we record a transaction, we must record a change in at least two different accounts. Having two or more accounts change will allow us to keep the accounting equation in balance.
• Not only will at least two accounts change, but there must also be at least one debit and one credit side impacted.
• The sum of the debits must equal the sum of the credits for each transaction.

In order for companies to record the myriad of transactions they have each year, there is a need for a simple but detailed system. Journals are useful tools to meet this need.

Debits and Credits

Each account can be represented visually by splitting the account into left and right sides as shown. This graphic representation of a general ledger account is known as a T-account . The concept of the T-account was briefly mentioned in Introduction to Financial Statements and will be used later in this chapter to analyze transactions. A T-account is called a “T-account” because it looks like a “T,” as you can see with the T-account shown here.

A debit records financial information on the left side of each account. A credit records financial information on the right side of an account. One side of each account will increase and the other side will decrease. The ending account balance is found by calculating the difference between debits and credits for each account. You will often see the terms debit and credit represented in shorthand, written as DR or dr and CR or cr , respectively. Depending on the account type, the sides that increase and decrease may vary. We can illustrate each account type and its corresponding debit and credit effects in the form of an expanded accounting equation . You will learn more about the expanded accounting equation and use it to analyze transactions in Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions .

As we can see from this expanded accounting equation, Assets accounts increase on the debit side and decrease on the credit side. This is also true of Dividends and Expenses accounts. Liabilities increase on the credit side and decrease on the debit side. This is also true of Common Stock and Revenues accounts. This becomes easier to understand as you become familiar with the normal balance of an account.

Normal Balance of an Account

The normal balance is the expected balance each account type maintains, which is the side that increases. As assets and expenses increase on the debit side, their normal balance is a debit. Dividends paid to shareholders also have a normal balance that is a debit entry. Since liabilities, equity (such as common stock), and revenues increase with a credit, their “normal” balance is a credit. Table 3.1 shows the normal balances and increases for each account type.

When an account produces a balance that is contrary to what the expected normal balance of that account is, this account has an abnormal balance . Let’s consider the following example to better understand abnormal balances.

Let’s say there were a credit of $4,000 and a debit of $6,000 in the Accounts Payable account. Since Accounts Payable increases on the credit side, one would expect a normal balance on the credit side. However, the difference between the two figures in this case would be a debit balance of $2,000, which is an abnormal balance. This situation could possibly occur with an overpayment to a supplier or an error in recording.

We define an asset to be a resource that a company owns that has an economic value. We also know that the employment activities performed by an employee of a company are considered an expense, in this case a salary expense. In baseball, and other sports around the world, players’ contracts are consistently categorized as assets that lose value over time (they are amortized).

For example, the Texas Rangers list “Player rights contracts and signing bonuses-net” as an asset on its balance sheet. They decrease this asset’s value over time through a process called amortization . For tax purposes, players’ contracts are treated akin to office equipment even though expenses for player salaries and bonuses have already been recorded. This can be a point of contention for some who argue that an owner does not assume the lost value of a player’s contract, the player does. 5

• 1 Center for Audit Quality. Guide to Public Company Auditing . https://www.iasplus.com/en/binary/usa/aicpa/0905caqauditguide.pdf
• 2 Center for Audit Quality. Guide to Public Company Auditing . https://www.iasplus.com/en/binary/usa/aicpa/0905caqauditguide.pdf
• 3 Financial Accounting Standards Board. “The Conceptual Framework.” http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774
• 4 Financial Accounting Standards Board (FASB). “Accounting for the Tax Cuts and Jobs Act.” https://www.fasb.org/taxcutsjobsact#section_1
• 5 Tommy Craggs. “MLB Confidential, Part 3: Texas Rangers.” Deadspin. August 24, 2010. https://deadspin.com/5619951/mlb-confidential-part-3-texas-rangers

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• Publication date: Apr 11, 2019
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• How to approach Advanced Audit and Assurance

The first article in this series of two on Paper P7 case study questions discussed question style, what to look for in the requirements, how higher-level skills are tested, and the meaning of professional marks within a question requirement. This second article goes through part of a typical Section A case study question, applying the recommended approach described in the previous article. This approach comprises four stages.

Stage 1 – understanding the requirement

The first thing to do is to read and fully understand the question requirement. Here is the requirement we will be looking at in this article:

‘Prepare a report, to be used by a partner in your firm, in which you identify and evaluate the professional, ethical, and other issues raised in deciding whether to accept the appointment as provider of an assurance opinion as requested by Petsupply Co.’ (12 marks)

Note: this requirement includes two professional marks.

Having read the requirement, break it down. You are asked to do two things:

• identify, ie state from the information provided
• evaluate, ie discuss from a critical point of view.

The requirement asks you to consider ‘professional, ethical, and other issues’. This could cover a wide range of considerations, such as:

• ethics: independence, competence, conflicts of interest, confidentiality, assessing integrity
• professional issues: the risk profile of the work requested, the fee – and whether it is sufficient to compensate for high risk, availability of staff, managing client expectations, logistical matters such as timing, legal and regulatory matters – such as money laundering, and (in some cases) obtaining professional clearance
• other issues: whether the work ‘fits’ with the commercial strategy of the audit firm, the potential knock-on effect of taking on the work – such as the impact on other clients, or on other work performed for this client.

You are asked to produce a report, so remember that the professional marks available will be awarded for using the correct format, the use of professional business language, and for presenting your comments as a logical flow culminating in a conclusion.

From reading the requirement, you know that the question scenario will be based on a potential assurance assignment and will be broadly based around acceptance issues.

Stage 2 – reading the scenario

When reading through the detail of the scenario, you should now be alert to information relevant to this requirement. Highlight important points that you think are relevant to the scenario and remember to focus on issues that could affect your acceptance of a potential assurance assignment.

Now read the following extract from the scenario and highlight the salient points – remember to look out for any factors relevant to the ethical, professional, and other issues described above.

Extract: You are a senior manager in Dyke & Co, a small firm of Chartered Certified Accountants, which specialises in providing audits and financial statement reviews for small to medium-sized companies. You are responsible for evaluating potential assurance engagements, and for producing a brief report on each prospective piece of work to be used by the partners in your firm when deciding whether to accept or decline the engagement. Dyke & Co is keen to expand the assurance services offered, as a replacement for revenue lost from the many small‑company clients choosing not to have a statutory audit in recent years. It is currently May 2007.

Petsupply Co has been an audit client of Dyke & Co for the past three years. The company owns and operates a chain of retail outlets selling pet supplies. The finance director of Petsupply Co recently communicated with your firm to enquire about the provision of an assurance report on data provided in the Environmental Report published on the company’s website. The following is an extract from the e-mail sent to your firm from the finance director of Petsupply Co:

‘At the last board meeting, my fellow directors discussed the content of the Environmental Report. They are keen to ensure that the data contained in the report is credible, and they have asked whether your firm would be willing to provide some kind of opinion verifying the disclosures made. Petsupply Co is strongly committed to disclosing environmental data, and information gathered from our website indicates that our customers are very interested in environmental matters. It is therefore important to us that Petsupply Co reports positive information which should help to retain existing customers, and to attract new customers. I am keen to hear your views on this matter at your earliest convenience. We would like verification of the data as soon as possible.’

You have looked at Petsupply Co’s Environmental Report on the company website, and found a great deal of numerical data provided, some of which is shown below in Table 1.

Table 1: Petsupply Co's environmental report – numerical data

Stage 3 – take time to think about the requirement and the scenario.

As discussed in the previous article, you must take time and not rush to answer. When evaluating this particular scenario try to think widely about the information provided. Your answer should cover a broad range of issues rather than concentrating on one or two. Your comments must be tailored to the scenario. It is pointless, for example, to write about a general acceptance issue which is not specifically related to Petsupply Co.

It is important to appreciate that few marks will be available for stating the issue. The higher-level skill marks in this question will be awarded for a discussion of why the issue is relevant to the decision about whether or not to provide the assurance service to Petsupply Co. The requirement is to evaluate the scenario and therefore it is crucial to demonstrate an appreciation that there may be two conflicting sides to the discussion.

Table 2 shows an example of a thought process which identifies the issues and explains why each issue is relevant to the requirement; the issues are shown in the order in which they appear in the question.

Table 2: Example of a thought process which identifies issues and shows relevance to the requirement

Table 2 is not an answer, it is a thought process. This is what you should be thinking about after reading through the scenario. The previous article stressed the importance of thinking through the scenario. It may help to jot these ideas down in an answer plan before making a start on your written answer, as this will help you to prioritise the points and give the report a logical flow.

Stage 4 – writing the report

The requirement states that two professional marks are available. As discussed in the previous article, these marks are not for the technical content of the answer, but for the way the relevant points are communicated. The report will be evaluated on the following:

• Use of a report format – a brief introduction, clear separate sections each discussing a different point, and a final conclusion.
• Style of writing – the report is addressed to the partner and so language should be appropriate. You do not need to explain things that would be obvious to a partner, and you must be tactful.
• Clarity of explanation – make sure that each point is explained simply and precisely, and avoid ambiguity.
• Evaluation skills – demonstrate that each point may have a positive and a negative side.

Remember, when answering any question requirement it is quality not quantity that counts. You should make each point succinctly and remain focused on the specific requirement. Questions can be time pressured, but it is important to remember that you should be able to read the requirement, think about it, and write an answer in the time available. This means that there is only a limited amount of time available for actually writing the answer, so keep it short and to the point. Irrelevant waffle earns no marks and will detract from the professional skills evaluation. What follows is an outline report format for this requirement:

Introduction

• Report is internal, addressed to a partner, covering proposed assurance service for existing audit client

Section 1 – ethical matters

• Provision of non-audit service
• Impact on total fee from client
• Competence to perform work – specialised engagement

Section 2 – risk-related matters

• High inherent risk – figures prone to manipulation
• Data highly subjective
• Need to rely on systems put in place by client

Section 3 – commercial matters

• Fee will have to be high enough to compensate for high risk
• Fee may need to compensate for specialists if used
• Strategic fit – assignment in line with commercial goals of Dyke & Co
• Build up experience in non-audit service
• Ascertain whether assignment will be recurring

Section 4 – other matters

• Managing client expectation regarding type of opinion sought
• Managing client expectation regarding timeframe
• Summary of key issues and decision on acceptance

Note: not all of the above points are necessary to secure a pass mark; the marking scheme is also flexible enough to cater for comments that may not appear in the ‘model answer’.

This article shows how to approach one requirement from a typical Section A question in Paper P7. It is important to practise technique by attempting as many questions as possible, starting with the Pilot Paper for Paper P7.

Written by a member of the Paper P7 examining team

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Accounting Concepts and Principles

This article will discuss accounting concepts and principles. For better understanding, we have also discussed the conventions of accounting.

Table of Content

Accounting principles help to fill the gap and focus to bring some level of standardization in financial reporting. If each business makes the financial statement in their method, then there will be an enormous amount of financial statement formats trying to reflect similar information. It becomes almost unachievable for a business to compare and understand the statements of other companies. As an outcome, financial data becomes incomparable and difficult to understand. Accounting principles include the accounting concepts and conventions that help to understand the financial statements and help the management to make reliable decisions. 

MEANING OF ACCOUNTING

Accounting is an important part of every business irrespective of the size of the business entity. With the business requirements of modern times businesses, business and accounting go hand in hand, they cannot function without each other. By recording all the financial transactions, accounting helps in ascertaining the financial performance of the business by preparing financial statements. These financial statements are used by both internal stakeholders as well as external stakeholders like the investors, tax authorities, regulators, banks, and other users.

MEANING OF ACCOUNTING PRINCIPLES

The accounting principle states the common rules or regulations for recording financial transactions and making financial statements. Accounting principles are the initial guidelines for recording and preparing financial statements. The accounting principles are generally termed as ‘Generally Accepted Accounting Principles or simply GAAP.

Accounting principles help to convey standardization in accounting and preparing financial statements and it is applied worldwide. The supervisors and authorities of every country may have their accounting principles like UK GAAP, USA GAAP, Ind As, IFRS, and others, but at the central, the fundamentals and objectives of accounting principles continue to be the same. Accounting principles are accepted if they are objective, operational in practical circumstances, dependable, economical, in the sense that they can be applied without suffering high costs, and logical to those with a minimum required knowledge in finance.

BASIC ACCOUNTING PRINCIPLES

There are certain basic principles of accounting that are to be kept in mind while preparing financial statements. The following are discussed below:

Historical Cost Principle

This principle needs the companies to keep a track of the goods purchased, services rendered, or capital assets acquired at the price expended for them. Assets are then recorded on the balance sheet at their historical cost without adjusting them for the changes in the market value of these assets.

Revenue Recognition Principle

This principle needs the companies to record their income or revenue as and when it is earned instead of when it is received. This accrual basis of accounting provides a more precise presentation of financial events that occurred during the accounting period.

Matching Principle

This principle mentions that all the expenses must be matched and recorded with their particular revenues at the time that they were experienced instead of when they are spent. This principle coordinates with the principle of revenue recognition confirming that all incomes and expenses are recorded on an accrual basis.

Disclosure Principle

This principle necessitates that any information that would significantly affect the decision of the user of financial statements about the company must be disclosed in the form of notes in the financial statements. This restricts the companies from misappropriating significant information about accounting practices or known possibilities in the future.

Cost-Benefit Principle

This principle binds the essential amount of research and time to record or account for the financial information if the cost crosses over the benefit. Therefore, if recording an insignificant event costs the company a substantial amount of money, it should not be recorded in the books.

Conservatism Principle

It is the principle that shows the general idea of identifying expenses and liabilities as soon as possible when there is doubt about the result but to only identify revenues and assets when they are confident of being received.

Objectivity Principle

Under this principle, the financial statements, records of accounts, and financial information as a total should be not dependent and free from biases. The financial statements are intended to show the financial position of the company and not to influence the end-users to take appropriate actions.

Consistency Principle

This principle mentions that all accounting principles and traditions should be functional steadily from one period to the other. This guarantees that financial statements can be compared between different stages and during the past of the company.

MEANING OF ACCOUNTING CONCEPTS

Accounting Concepts can be taken as the basic accounting statement, which acts as a base for the preparation of a financial statement of an enterprise. This forms a foundation for framing the accounting principles, methods, and procedures, to record and present the financial dealings of a business. These concepts provide an integrated building and rational method of the accounting process. Every financial transaction that arises is understood taking into attention the accounting concepts, which guide the methods of accounting.

BASIC ACCOUNTING CONCEPTS

Various accounting concepts help to frame financial statements accurately. Some of the accounting concepts are as follows:

Business entity concept:  This concept implies that a business and its proprietor should be treated distinctly for the financial transactions of the business.

Money measurement concept:  This concept shows that only business dealings that can be expressed in monetary terms are documented in accounting, and the records of other types of events may be disclosed separately in the books. 

Dual aspect concept:  This concept implies that for every account credit, a matching account shall be debited. Therefore, the dual aspect concept completes the recording of the transactions.

Going concern concept:  This concept means that a business is anticipated to last for a reasonably long time and carry out its activities and obligations. This predicts that the business will not be required to rest working and discharge its assets at unreasonable prices.

Cost concept:  This concept requires that the fixed assets of a business are documented based on their initial cost in the first year of accounting. Eventually, these assets are recorded deducting the amount of depreciation. A rise or fall in the market price of the assets is not considered. This concept is only applicable to fixed assets.

Accounting year concept:  This concept implies that each business indicates a particular period to complete an accounting cycle process, for example, monthly, quarterly, or annually as per a fiscal or a calendar year.

Matching concept:  This concept implies that for every transaction of revenue recorded in a particular accounting period, a corresponding expense transaction has to be recorded for accurately calculating profit or loss in a given accounting period.

Realization concept:  As per this concept, profit is identified in the books only when it is earned. An advance or fee paid is not identified as a profit till the goods or services have been transported to the buyer.

MEANING OF ACCOUNTING CONVENTIONS

Accounting Conventions as the name recommends are the methods accepted by an enterprise over some time, that depend on the common contract between the accounting bodies and help in supporting the accountant at the time of preparation of a financial statement of the company. To advance the value of financial data, the accounting bodies of the world may amend or change any accounting convention.

BASIC ACCOUNTING CONVENTIONS

Conservatism.

It is the convention by which the transaction with a lower amount is recorded when two transactions of different amounts are provided. By this convention, profits are not recorded for an overestimated amount, and losses or expenses are provided as provisions in the books.

Consistency 

This convention implies the usage of the same principles of accounting from one period to the other period of an accounting cycle so that the same methods are functional to calculate profit and loss earned during a period.

Materiality 

This convention shows that all significant facts should be recorded and disclosed in the books of accounts. Accountants should record important data and can ignore information that is not significant.

Disclosure 

This convention implies the disclosure of all information, both advantageous and disadvantageous to a business enterprise, and which are of significant value to creditors and debtors.

Accounting helps in ascertaining the financial performance of the business by preparing financial statements. The accounting principles are generally termed as ‘Generally Accepted Accounting Principles or simply GAAP. The accounting principle states the common rules or regulations for recording financial transactions and making financial statements. Every financial transaction that arises is understood taking into attention the accounting concepts, which guide the methods of accounting. Accounting Conventions as the name recommends are the methods accepted by an enterprise over some time, that depend on the common contract between the accounting bodies and help in supporting the accountant at the time of preparation of a financial statement of the company.

Frequently asked questions

Get answers to the most common queries related to the CBSE Class 11 Examination Preparation.

What is meant by accounting?

What do you understand about accounting principles, what do you understand about the principle of revenue recognition, what are accounting concepts, what is consistency in business.

Ans. Accounting is useful in knowing the financial performance of the business by preparing financial statements and it helps the users of the statements in decision-making.

Ans. The accounting principle implies the general rules or regulations required for recording financial transactions and preparing financial statements.

Ans. This principle requires the companies to record their income or revenue as and when it is earned instead of when it is received.

Ans. The methods of accounting that guide how every transaction is to be recorded in the books are known as accounting concepts.

Ans. The convention that asks for the usage of the same principles of accounting from one period to the other period of an accounting cycle so that the same methods can be operated to calculate profit and loss earned during a period is the convention of consistency in a business.

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Data Correction

Exam pattern for class 11th, registration process, related articles, written down value method (wdv).

The written down value method is a tool to evaluate the depreciation in a company’s fixed asset to determine the correct valuation of the asset’s value.

Writing of Journal Entries

In this article, we will learn about journal entries, writing journal entries, format and rules.

• Withdrawal Slip

In this article, we will discuss withdrawal slip, Cash withdrawals, Bank withdrawals and more. We will also discuss some important questions related to these topics.

What is the Basis of Accounting?

Business transactions are documented in the books of account according to one of three accounting bases: (i) Cash Basis of Accounting; (ii) Accrual Basis of Accounting; or (iii) Hybrid Basis of Accounting.

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Case Study | Part 1-Financial Accounting Principles and Analysis

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